Are You Prepared for an IRS 501r Audit?

Three main points:

1. The TIGTA listed 501r audits on its 2024 Annual Audit Plan.
2. Most audits are remote, but on-site audits happen when there is incomplete information.
3. Having access to the information needed for an on-site audit will ensure you are ready for any 501r audit the IRS demands.

The Treasury Inspector General for Tax Administration (TIGTA) released its 2024 Annual Audit Plan and Nonprofit Hospital Compliance Efforts were on the list of audits. The list of IRS 501r audit plans states that the TIGTA will, “assess the IRS’s oversight of tax-exempt hospitals to ensure that they are compliant with providing community benefits and other requirements.” What does that mean for you? In this article we’ll review the history of 501r, Schedule H and what you can do to prepare for both remote and on-site audits.

IRS 501r Background

In 2005-06, Senator Chuck Grassley started inquiring about the “community benefit” of nonprofit hospitals, which lead to the IRS releasing Schedule H on Form 990 requesting more information of nonprofit organizations, but that still was not enough. In 2010, the IRS was required to create 501r to show that hospitals were providing enough “community benefit” to receive nonprofit status. It was released in 2016 and came into effect in 2017.

Schedule H (Form 990)

Form 990 Schedule H is used by hospital organizations to report information on their charity care, community benefit activities provided by its hospital facilities, and other non-hospital health care facilities that it operated during the tax year and other information related to tax exemption. It asks several questions of hospitals, including:

• Is there a financial assistance policy (FAP)?
• Did you have FAP during the tax year?
• What is your organization using to make the determination if an individual is eligible for financial assistance?
• Did your organization use Federal Poverty Guidelines (FPG) for determination of discounted care?

There are other questions asked to show that your organization is a community benefit and it covers FAP, extraordinary collection activities (ECAs), bad debt expenses and collection policies.

IRS 501r Audits

The Affordable Care Act (ACA) requires the IRS to review every hospital for 501r at least every three years. The majority of reviews happen remotely by looking at your Form 990, financial statements and making sure your website has the required elements. But sometimes the IRS requires more. On-site audits are much more in-depth and often start with an Information Document Request (IDR). What is an IDR?

An IDR requires an extensive list of documentation. This ranges from web pages, policies, board minutes, examples, interviews and more. And IDR can include:

• Evidence of adoption such as board minutes or resolution that discuss the FAP.
• Exact web pages for financial assistance, FAP, Emergency Medical Treatment and Labor Act (EMTALA) information and your billing/collections policy.
• The above information must also be translated for 5% of population or per 1,000 people, and they must also be machine readable.
• Copy of Translated Documents.
• Copies of your policies for financial assistance, FAP, EMTALA and billing/collections.
• The Amount Generally Billed (AGB) and where it is located in your FAP.
• Gross and AGB charges for all emergency and medically necessary care.
• How your financial assistance information is widely publicized.
• Copy of a Billing Statement (with conspicuous written notice).
• Onsite Tour of Signage (to show how it is widely publicized).
• List of Extraordinary Collection Actions (ECA) performed.
• Three examples of ECAs performed with timeline.
• Final Notices sent with three examples.
• Examples of ECA legal of judicial actions taken.
• Copy of contract(s) with collection agenc(ies) with 501r addressed.
• Names for individual interviews.
• Complaints from Patients regarding 501r (This is not required anywhere in the regulation.)
• List of providers for FAP. (With last date updated.)

Preparing for an IRS 501r Audit

The information required for an on-site audit is extensive and if you’re not prepared can cause you a lot of headaches. The best plan is to be well prepared. If your hospital receives an IRS audit there are some steps to help you put your best foot forward.

1. Identify the person or persons who will be coordinating the hospital’s response to any IRS 501r inquiry. Ensure the appropriate staff know where any IRS communications should be routed.
2. Conduct your own internal “audit” of compliance with IRS 501r. Pay special attention to the FAP requirements, including translation, signage and website placement of all FAP-related documents.
3. Review patient complaints regarding billing and collection issues regularly throughout the year, assigning a point-person to respond to – and maintain records related to – the same billing and collection complaints.
4. Identify the hospital employees that are best suited to working with the IRS about:
   1. Billing and collection issues, and
   2. The community health needs assessment (CHNA)

Be sure that these people have recently reviewed the IRS 501r requirements and/or worked with legal counsel.

Conclusion

Properly preparing for the IRS 501r audits can keep you on track in the event of an on-site audit, and it will make passing a remote one a breeze. If you have questions about IRS 501r and being prepared for an IRS audit, let us know how Americollect can help!