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IRS Continues Progress on Revised Form 990 Rules
Health Law Perspectives
May 1, 2008

On April 7, 2008, the Internal Revenue Service (“IRS”) released the draft instructions to the proposed revised Form 990 (Return of Organization Exempt from Income Tax), which many nonprofit tax-exempt healthcare entities will be required to file in 2009 for fiscal year 2008. 

The release of the draft instructions continues the IRS’s process of making its first major overhaul to Form 990 since 1979, which began with the release of the initial draft of the revised Form 990 in June of 2007.  Based upon the public comments it received, the IRS released a revised version of the new Form 990 on December 20, 2007.

One of the key features of the proposed revised Form 990, is the new Schedule H, which all tax-exempt nonprofit hospitals will be required to complete.  The IRS determined that it was necessary to expand Form 990 to include more information from tax-exempt hospitals and healthcare entities, since the IRS believed that, under the prior Form 990, there previously was inadequate reporting of information regarding community benefit activities or service to the public consistent with the benefits of tax-exemption by such entities.  Thus, the proposed Schedule H includes reporting information regarding a number of categories broken up into six parts, five of which will be optional for tax-exempt hospitals for fiscal year 2008 (for filing in 2009) and one of which will be mandatory.  All six parts will be required to be completed by all tax-exempt hospitals beginning with fiscal year 2009 (for filing in 2010).

Part I of Schedule H requests information regarding charity care, including unreimbursed Medicaid, other unreimbursed costs for other means-tested government programs, and other community benefits, such as community health improvement services, health profession education, subsidized health services, and research and benefits to community groups.  Part II requests information regarding community building activities, such as physical improvements and housing, economic development, community support, environmental improvements, leadership development and training of the community, coalition building, community health improvement advocacy and workforce development.  Part III requests information regarding bad debt, Medicare and collection practices, including whether the organization has specific collection practices pertaining to patients who are known to qualify for charity care or financial assistance.  Part IV requests information regarding management companies and joint ventures, including percentage ownership and/or control by the tax-exempt entity, certain interested persons and physicians.  Part V requests information regarding all the facilities operated by or affiliated with the tax-exempt entity and is the only part that will be required to be completed for fiscal year 2008 (for filing in 2009).

Part VI requires certain supplemental information, including (1) supplementing some of the responses to the earlier parts; (2) describing how the hospital determines the healthcare needs of the community it serves (“Needs Assessment”); (3) describing how the hospital makes patients aware that they may be eligible for assistance under the hospital’s charity care policy (“Patient Education of Eligibility for Assistance”); (4) describing the community the hospital serves in terms of geography and demographic information (“Community Information”); (5) describing how the hospital’s community building activities described in Part II promote the health of the community the organization serves (“Community Building Activities”); (6) providing any other information regarding how the organization promotes the health of the community (such as open medical staff, community board, use of surplus funds etc.); (7) if the organization is part of an affiliated healthcare system, describing the respective roles of the organization and its affiliates in promoting the health of the community served; and (8) if applicable, identifying all states with which the organization must make a community benefit report.

The new Form 990 and Schedule H will greatly increase the reporting requirements of nonprofit tax-exempt hospitals.  For this reason, tax-exempt hospitals should begin working with their internal compliance officers, chief financial officers, outside auditors and legal counsel to address the issues raised by the reporting requirements of Schedule H.  In particular, because of the extensive new reporting requirements regarding joint ventures, financial relationships, corporate governance and key employees, tax-exempt hospitals will need to carefully review their current joint ventures and financial relationships, compensation of key employees, which may include payments made to physicians or medical groups and their corporate governance policies.  Thus, nonprofit tax-exempt hospitals would be prudent in using this as a good opportunity to restructure any potentially problematic joint ventures, financial relationships or compensation arrangements.  In addition, it is a good opportunity for all tax-exempt healthcare entities to revisit their corporate governance practices, including considering adopting formal compliance programs and board and employee conflict of interest policies.

Tax-exempt healthcare entities that have engaged in tax-exempt bond financing will also be required to file a new Schedule K beginning in tax year 2008.  Among other things, Schedule K requires information regarding bond financings and the use of the proceeds from such financings.  Like Schedule H only certain parts will be required to be completed for fiscal year 2008 (for filing in 2009).

For further information, please contact Bob Lundy, Todd Swanson, or David Hatch, in  Los Angeles at (310) 551-8111,  Stephen Phillips in San Francisco at (415) 875-8500, or Stephen Treadgold in San Diego at (619) 744-7300.

For media assistance, please contact Maura Fisher at 202-580-7714.