Topic

RECENT INTERNAL REVENUE SERVICE DEVELOPMENTS:
THE TAXPAYERS BILL OF RIGHTS ACT -- P.L. 104-168
Signed into law: July 30, 1996
Effective: immediately

Summary

The Taxpayers Bill of Rights Act allows the Internal Revenue Service (IRS) to fine a tax-exempt hospital for certain tax-law indiscretions. Previously, the IRS could only strip the institution of its tax-exempt status. Now, the law permits the IRS to level financial penalties on hospital officials or others with influence over decision making who are engaged in improper financial transactions, and contains new financial disclosure requirements for tax-exempt organizations.

The law:

  • Allows the IRS to impose a penalty when it finds that an individual received excess benefit (for example, unreasonable compensation or a transaction exceeding more than "fair market" value). The penalty is 25 percent of the amount of the excess benefit. And, the IRS can impose an excise tax of 10 percent of the excess benefit, up to $10,000, on managers who approve these transactions. The law applies to all transactions that have occurred since Sept. 14, 1995.
  • Requires tax-exempt hospitals to respond within 30 days to any written request for copies of their Form 990. Hospitals must provide copies of those forms without charge, other than a reasonable fee for reproduction and mailing.

Implications for hospitals and health systems

The new penalty for tax-law violations permits the IRS to take a more realistic approach to cases involving misuse of not-for-profit funds. The IRS rarely revoked a hospital's tax-exempt status when responding to private inurement violations. Now, the agency has a statutory tool to correct those problems.

Congress, in a report accompanying the new legislation, gives hospital transactions a "presumption of reasonableness" when they are approved by an independent board; comparable to terms paid by other organizations for comparable positions; justified by appraisals, surveys or other evidence; and documented in the organization's records. We urge exempt hospitals to take advantage of this approach to support their actions and policies.

Bottom line: The new law allows the IRS to fine people for doing wrong without endangering the tax exemption of the hospital. As for the new Form 990 disclosure requirements, failure to comply will result in a daily fine of $20, up to a maximum $10,000.

Topic

RECENT INTERNAL REVENUE SERVICE DEVELOPMENTS: PHYSICIAN PARTICIPATION IN GOVERNANCE

Summary

Through both formal and informal means, the Internal Revenue Service (IRS) has announced it will no longer apply its "80/20 rule," which limits physician participation on hospital or health system governing boards to 20 percent of the board's total membership. Instead, the IRS is relying on hospitals to put in place effective conflict-of-interest policies that help ensure the organization is serving the community's interests. The agency views these policies as a way to make sure that people who have influence over the organization's decisions are not able to use that influence to inappropriately benefit themselves.

The IRS may never issue a single policy statement regarding this issue for use in the field. Instead, as has been the practice for several years, IRS officials have made speeches outlining their intention regarding the 80/20 rule. In addition, the IRS has described components of an adequate hospital conflict-of-interest program in its draft "IRS Community Board and Conflict of Interest Policy." In final form, this document will be used by IRS agents for guidance in enforcement. The IRS will call on hospitals to periodically review their operations, particularly compensation arrangements, acquisition of physician practices, and joint ventures and partnerships, to make sure they are consistent with their community service.

Implications for hospitals and health systems

The new IRS approach will remove a major stumbling block to integrating with physicians. Focus on a conflict-of-interest policy reinforces the importance of the board's role and promotes self-policing within the organization.

 

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