US IRS targeting 501's for audits

[conflict]

The IRS Tax Exempt/Governmental Entities (TE/GE) Joint Council
met on February 26, 2016. In this meeting the group confirmed:

• Tax-exempt hospitals will likely be targets of stepped up
  compliance checks and examinations as required by the Affordable
  Care Act.
• Annually, approximately 1,000 compliance reviews have been
  performed but this number will increase going forward.
• 30 IRS agents have been re-deployed to facilitate this
  function.
• Most of these stepped up reviews will be on a non-contact
  basis.
• The discovery of compliance lapses or the need for
  clarification may initiate direct contact or an actual
  examination.
• Examination of 501(r) compliance could potentially lead to
  examination of other unrelated issues.

Compliance with the 501(r) regulations was required for tax
years beginning after December 29, 2015. It is important to note
that the IRS gave hospitals a minimum of a year to transition to
these new regulations. The proposed rules with which a reasonable
good faith effort at compliance was to be made have been around a
couple of years now and it does not appear that much leeway will be
given if a hospital is not in compliance now, at least from the IRS
perspective.

During the TE/GE meeting, Preston Quesenberry, Senior Technician
Reviewer, IRS Office of Chief Counsel, was asked if hospitals that
should currently already be 100% compliant but are scrambling to
get there would be required to correct the deficiency and disclose
the error or omission. His excerpted answer is as follows:

"...I think it's going
to depend on the particular circumstance or the particular
non-compliance you're talking about. You have to look at it and
say is this a minor deal or is this a major deal? The fact that
it's the first year of implementation, I don't think would
really play into that analysis at all... just because it's the
first year of implementation that that automatically means you have
reasonable cause or it's inadvertent. There was more than a
year transition period for the calendar year hospitals, longer for
other hospitals..."

Because Schedule H of Form 990 requires affirmative answers to
many of the procedures required by these regulations, red flags may
occur if the answers indicate non-compliance. If Schedule H is the
starting point for the referenced "non-contact' reviews
noted earlier, the answers might result in an actual contact
review.

Hospitals should continue to work diligently to meet the
compliance deadline for their tax year, taking into consideration
the many requirements of 501(r). Remember there is a requirement to
correct and disclose deficiencies as well as potential imposition
of facility level excise taxes and, ultimately, loss of tax-exempt
status.