Publications: Information Gathering and Audits Regarding Charity Care Practices Continue to Escalate both at the State and Federal Level

To read the original Client Update in PDF format, please click the Related Files link.

At the state level, the Office of the Illinois Attorney General continues to issue subpoenas to Illinois hospitals, gathering information on charity care practices in support of its charity care legislative initiative. Such subpoenas began in 2003 and to date have been issued to over 40 hospitals.

According to our partner Floyd Perkins, who spent fourteen years with the Attorney General’s office in the Charitable Trust Bureau, the Attorney General’s Office is determined to gather significant information in a short time frame, but has agreed to reasonable extensions and has shown some flexibility in terms of the scope of requisite hospital responses. Answering these subpoenas effectively and efficiently requires attention to confidentiality concerns and a recognition of the collaborative nature of the process established by the Attorney General.

At the federal level, the IRS recently began a new initiative to investigate whether tax-exempt §501(c)(3) hospitals meet their community benefit and charity care standards. While a number of exempt hospitals recently received the questionnaire, this will be an ongoing process as the IRS contemplates issuing them to nearly 600 tax-exempt hospitals across the U.S. Recipients must respond as part of maintaining their tax-exempt status. A copy of the questionnaire (Form 13790)is included with this communication.

Perkins, who is also a member of the IRS Great Lakes TE/GE Council, advises organizations to respond to the questionnaires in a timely manner, and also to perform substantial internal due diligence to ensure that the organization is duly credited for its charity care and community benefit activities. Moreover, hospitals need to carefully document their charitable activities, community benefit and charity care in responding to the IRS initiative, as well as in all future community benefit reports, since tax exempt qualifications are under examination in all levels of government. Finally, to the extent charity care and bad debt data overlap, the organization should fairly allocate charity care costs and provide an explanation for such allocation.

As state and federal regulators continue their investigation into charity care/community benefit practices, it is imperative that all exempt hospitals -- not only those that receive related questionnaires or subpoenas -- understand regulatory concerns and be prepared to demonstrate charitable care/community benefit activities. The findings of an internal audit of such activities, using the IRS questionnaire as a guide, would be informative to officers and directors accountable for hospital compliance and operations.