Listen to this post

Tax the Rich

For many weeks, we’ve been hearing about the IRS’s plans to use the funding provided under the Inflation Reduction Act[i] to increase and expand its compliance and enforcement efforts with respect to the wealthy, high-income earners, partnerships, and large corporations.

According to the IRS, not only will the agency add a significant number of new employees, especially examiners, it will also introduce the use of new technologies, including artificial intelligence, to identify persons who may be skirting their tax obligations.

What About Hospitals?

One item that has not yet received anywhere near the attention that the foregoing plans have attracted within the tax community – though it is certainly warranted – is the very strong possibility that Congress and the IRS will renew their focus on certain tax-exempt charitable organizations.[ii]  

This past summer, Senators Warren and Grassley addressed a letter (the “Letter”)[iii] to the IRS Commissioner and to the agency’s Tax Exempt Entities Division in which the Senators expressed their concern over the growing amount of medical debt owed by members of the general public to tax-exempt, non-profit hospitals. The letter cited reports that certain hospitals, despite their tax-exempt status, have avoided providing care in their communities for those who need it most.

A couple of months later, the Senate’s HELP Committee,[iv] chaired by Senator Sanders, released a report claiming that non-profit hospitals were failing to provide low-income Americans with the affordable medical care required by their non-profit status, despite receiving billions in tax benefits (the “Report”).[v] The Report accuses these hospitals of hoarding their resources to the detriment of patients. 

Before reviewing the measures proposed by the foregoing Letter and Report in response to the issues identified, let’s first consider how hospitals may qualify for tax-exempt status under current law.

Section 501(c)(3)[vi]

Organizations described in Section 501(c)(3) of the Code (broadly described as “charitable organizations”) generally are exempt from Federal income tax,[vii] are eligible to receive tax deductible contributions,[viii] have access to tax-exempt financing through State and local governments,[ix] and generally are exempt from State and local taxes.

A charitable organization must operate primarily in pursuit of one or more tax-exempt purposes constituting the basis of its tax exemption. The Code specifies such purposes as religious, charitable, scientific, educational, literary, and certain other purposes. In general, an organization is organized and operated for charitable purposes if it provides relief for the poor and distressed or the underprivileged.


The Code does not provide a per se tax exemption for hospitals – indeed, there are plenty of for-profit hospitals.[x]

Rather, a hospital may qualify for exemption if it is organized and operated for a charitable purpose and otherwise meets the requirements of Section 501(c)(3).[xi]

The promotion of health has long been recognized as a charitable purpose that is beneficial to the community as a whole.[xii] This includes not only the establishment or maintenance of charitable hospitals, but also of clinics and other providers of health care.

Community Benefit

For many years, the IRS has applied a ‘‘community benefit’’ standard for determining whether a hospital is charitable.[xiii]

A hospital-provided community benefit may include, for example:

  1. maintaining an emergency room open to all persons regardless of ability to pay;
  2. having an independent board of trustees composed of representatives of the community (to ensure responsiveness to community needs);
  3. operating with an open medical staff policy, with privileges available to all qualifying physicians;
  4. providing charity care (for those who cannot afford to pay); and
  5. utilizing surplus funds to improve the quality of patient care, expand facilities, and advance medical training, education and research.

Reporting Requirements

Since 2009, hospitals generally have been required to submit information on community benefit[xiv] on their annual information returns filed with the IRS.[xv] Among the items for which information is requested – and that are likely to be considered by the IRS is assessing a hospital’s charitable status – are the following:

  1. charity care that is provided at cost;
  2. the ratio of patient care costs to charges;
  3. the cost of Medicaid and other means-tested government health programs;
  4. the net cost of community health improvement services and community benefit operations;
  5. net cost of health professions education;
  6. net cost of subsidized health services; the cost of research conducted by the organization; and
  7. the costs of the organization’s activities that it engaged in during the tax year to protect or improve the community’s health or safety.[xvi]

Prior to the enactment of the Patient Protection and Affordable Care Act (the “Affordable Care Act”) in 2010,[xvii] however, the Code did not include sanctions short of revocation of tax-exempt status for hospitals that failed to satisfy the community benefit standard.[xviii] This left the IRS little room in which to operate with respect to troublesome organizations.[xix]

Affordable Care Act

The Affordable Care Act established additional requirements applicable to Section 501(c)(3) hospitals.[xx] It also introduced a couple of new taxes with respect to hospitals that failed these requirements.

Section 501(r)

To qualify for tax exemption under Section 501(c)(3), an organization is required to comply with the following requirements with respect to each hospital facility operated by such organization:

  1. conduct a community health needs assessment at least once every three taxable years and adopt an implementation strategy to meet the community needs identified through such assessment;[xxi]
  2. adopt, implement, and widely publicize a written financial assistance policy;[xxii]
  3. bill for medically necessary care provided to individuals who qualify for financial assistance no more than the amounts generally billed to individuals who have insurance covering such care;[xxiii] and
  4. do not undertake extraordinary collection actions against an individual without first making reasonable efforts to determine whether the individual is eligible for financial assistance.[xxiv]

Failure to Comply

Following the enactment of the Affordable Care Act, a hospital may have its tax-exempt status revoked if it fails to meet one or more of the requirements set out above.

In determining whether to continue to recognize the Section 501(c)(3) status of such a hospital with respect to one or more of its hospital facilities, the IRS will consider all relevant facts and circumstances including, but not limited to, the following:

  1. whether the organization has previously failed to meet the requirements;
  2. whether the same type of failure previously occurred;
  3. the size, scope, nature, and significance of the organization’s failures;
  4. in the case of an organization that operates more than one hospital facility, the number, size, and significance of the facilities that have failed to meet the requirements relative to those that have complied with these requirements;
  5. whether the organization had, prior to the failure(s), established practices or procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the requirements;
  6. whether the practices or procedures had been routinely followed and the failure(s) occurred through an oversight or mistake in applying them;
  7. whether the organization has implemented safeguards that are reasonably calculated to prevent similar failures from occurring in the future;
  8. whether the organization corrected the failure(s) as promptly after discovery as is reasonable given the nature of the failure(s); and
  9. whether the organization took the measures before the IRS discovered the failure(s).[xxv]

Notwithstanding a hospital’s failure to meet one of the foregoing requirements, the IRS will not treat such a failure as a basis for revoking the hospital’s tax-exempt status if the failure was neither willful nor egregious, and the hospital corrected and disclosed the failure.[xxvi]

Excise Tax

However, a hospital’s failure to meet the community health needs assessment requirement will result in the imposition of an excise tax.[xxvii] The tax is imposed for each taxable year that a hospital facility fails to meet the requirements.[xxviii] What’s more, the tax will apply even if the failure is corrected and disclosed.[xxix]

If a hospital organization operates multiple hospital facilities and fails to meet the community health needs assessment requirement with respect to more than one of the facilities it operates, the excise tax will be imposed on the hospital organization separately for each hospital facility’s failure.[xxx]

“Income Tax”

Speaking of taxes, if a hospital organization that operates more than one hospital facility fails to meet one or more of the above requirements separately with respect to a hospital facility during a taxable year, the income derived from the “noncompliant” hospital facility during that taxable year will be subject to a corporate level income tax[xxxi] if:

(i) The hospital organization continues to be recognized as an organization described in Section 501(c)(3) during the taxable year; but

(ii) The hospital organization would not continue to be recognized as described in Section 501(c)(3) during the taxable year based on the facts and circumstances if the noncompliant hospital facility were the only hospital facility operated by the organization.[xxxii]

A hospital organization operating a noncompliant hospital facility subject to income tax as described above will continue to be treated as an organization that is exempt from tax because it is described in Section 501(c)(3).[xxxiii] 

Of course, that assumes the hospital otherwise continues to satisfy the requirements for such tax-exempt status. If the circumstances of a hospital organization’s failure to comply are sufficiently egregious, the IRS will revoke the organization’s tax status.[xxxiv]

The Senators’ Letter

One might think that any non-profit hospital that realizes the economic value of its tax-exempt status, and that wishes to avoid the imposition of the taxes described above, would be diligent in satisfying the Code’s requirements; it will have established practices or procedures designed to promote and facilitate compliance, and it will have implemented safeguards that are calculated to prevent compliance failures.

The Letter and the Report, however, present a different picture – at least if we take them, and the studies on which they relied, at face value.

The Letter reminded the IRS that a hospital’s tax-exempt status is dependent upon its providing “benefits to a class of persons that is broad enough to benefit the community.”

“We are alarmed,” the Senators wrote, “by reports that despite their tax-exempt status, certain non-profit hospitals may be taking advantage of” the poorly defined community benefit standard “to avoid providing essential care in the community for those who need it most.”

Examples of Misdeeds

To prove their point, the Senators cited instances from various private reports which, the Senators claimed, supported the above statements:

“For example, the Community Service Society published a report revealing 56 nonprofit hospitals in New York filed liens on nearly 5,000 patients’ homes in 2017 and 2018. The liens were placed predominantly on homes in poor and rural areas * * * [M]any uninsured patients of the nonprofit hospital, Mosaic Life Care of St. Joseph, were charged full price for health care services that they should have received for free or a discounted rate. * * * Methodist Le Bonheur Healthcare brought over 8,300 lawsuits against patients and employees for unpaid medical bills, leading to attempted wage garnishments for thousands of those patients. The University of Virginia Health System filed 36,000 lawsuits for more than $106 million over a six year period that involved relentless debt-collection efforts. * * * Providence Health pursued a strategy to “wring money” out of patients and “pressure them to pay” for services when those patients were eligible for free care. * * * Allina Health System, a nonprofit health system in the Midwest * * * has a policy of denying care from patients who have unpaid medical bills. This practice of withholding care leaves patients with few options, especially those living in rural areas where Allina is the dominant health system.”

These examples, the Senators wrote, raised serious concerns that non-profit hospitals may not be fulfilling their required obligation to provide reduced or free care to their most vulnerable patients.

More is Needed

The Senators explained that the community benefit standard represents “what non-profit hospitals contribute to their communities in lieu of paying federal taxes.” In other words, this is the quid pro quo for their tax-exempt status, what differentiates them from for-profit hospitals.

However, according to the Senators, “[o]ne study of over 1,700 nonprofit hospitals found that 77 percent spent less on charity care and community investment than the estimated value of their tax breaks.”[xxxv]

After pointing out that the IRS is responsible for reviewing the community benefit activities of tax-exempt hospitals – thereby implying that the agency is not performing this task very well – the Senators acknowledged that the IRS’s oversight of such hospitals is “challenging” because of what they described as a lack of clarity around what constitute community benefits.

As a first step, the Senators urged that Form 990 and Schedule H be included in the IRS’s Priority Guidance Plan. These returns must be updated, the Senators stated, to ensure that hospitals’ community benefit information is standardized, consistent and easily identifiable. For example, the current “qualitative reporting” allows hospitals to describe the scope of the community benefits they provide in an open-ended, narrative format that fails to specify the funds used to improve facilities, equipment, and patient care.

The Letter also asked the IRS to address several questions and provide certain data including, among other things, a list of the most commonly reported community benefit activities that qualified a non-profit hospital for tax exemption, and the number of hospitals the IRS has identified as “at risk” for noncompliance with the community benefit standard.

In short, the Senators were disappointed with the conclusions drawn from the data, but acknowledged these may be attributable, in part, to the difficulty of clearly identifying the desired community benefits.

The Sanders Committee

Predictably, the Report from Senator Sanders’s Committee takes a harsher tone toward what it clearly believes is a significant violation by hospitals of their duty to provide charity care and community benefits.

The Report states that, in return for tax benefits, non-profit hospitals are required to operate for the public benefit by providing a set of community benefits, which includes ensuring that low-income individuals receive medical care for free or at significantly reduced rates.[xxxvi] Following the Affordable Care Act, the Report continues, hospitals must satisfy certain community benefit requirements; for example, hospitals must maintain a publicly available financial assistance program.

Unfortunately, according to the Report, “hospitals have gladly accepted the tax benefits that come with non-profit status but have failed to provide the required community benefits. The Report asserts that non-profit hospitals spent only an estimated $16 billion on charity care in 2020, or about 57 percent of the value of their tax breaks in the same year.”

Moreover, according to the Report, most of the hospital systems considered by the Committee – representing 16 of the largest in the country – “have failed to provide sufficient levels of charity care while they collect the benefits of tax exemptions and provide significant compensation packages to their senior executives.”

In case it has not conveyed its point clearly enough, the Report continues to pile on the less than favorable data:

“Non-profit hospitals could play a significant role in delivering necessary care to Americans while also satisfying their charity care obligations. Instead, these hospitals continue to hoard their resources to the detriment of the patients they claim to be committed to serving. Committee staff reviewed tax documents for 16 major non-profit hospital chains that each take in more than $3 billion in revenue annually. Twelve of the 16 dedicate less than two percent of their total revenue to charity care, including three of the nation’s five largest non-profit hospital chains. Of those twelve, six dedicate less than one percent of their total revenue to charity care.

“In recent years, non-profit hospitals have provided less charity care even as these hospitals saw a steady increase in their revenues and operating profits. One study found 86 percent of non-profit hospitals spent less on charity care than they received in tax benefits between 2011 and 2018. Another recent study found that non-profit hospitals increased their average operating profit by more than 36 percent, from about $43 million to almost $59 million, between 2012 and 2019. In the same time period, the hospitals almost doubled the cash balances they held in reserve, from an average of about $133 million to more than $224 million. Those additional operating profits and reserve funds were not used to help those most in need: in the same time period, average charity care spending dropped from just $6.7 million to $6.4 million.

“While these hospitals provide woefully insufficient care to the patients most in need, they provide massive salaries to their top executives. In 2021, the most recent year for which data is available for all of the 16 hospital chains, those companies’ CEOs averaged more than $8 million in compensation and collectively made over $140 million.”

In light of the foregoing, the Report concludes that the Federal government must act to hold tax-exempt hospitals accountable for the benefits they reap and for their moral obligation to provide accessible health care in their communities.

Senator Sanders points out[xxxvii] that current law does not set a floor[xxxviii] regarding the amount of financial assistance a non-profit hospital must provide to low-income patients, or the total amount of community benefit, including charity care, a non-profit hospital must provide to maintain its non-profit status. This means that non-profit hospitals can largely decide on their own how much (or how little) charity care they provide.[xxxix]

Never short of suggestions, the Senator asserts that Congress should take steps to ensure that non-profit hospitals are offering charity care at levels consistent with “the enormous tax breaks they receive.”

In addition to greater Federal oversight, the Report suggests limiting the tax breaks available to a hospital to the value of community benefits the hospital provides.[xl]

Another approach proffered by the Report is to require hospitals to provide community benefits that amount to a minimum stated percentage of the hospital’s net patient revenue, including a requirement that charity care and government-sponsored health care account for at least some stated percentage of net patient revenue.

Finally, the Report states that Congress should define the community engagement necessary to justify a hospital’s non-profit status. As discussed earlier, under the Affordable Care Act non-profit hospitals are required to conduct community health needs assessments to identify key health concerns for those living in the surrounding areas. In developing these needs assessments, non-profit hospitals are required to solicit input from underserved, low-income, and marginalized communities but are not statutorily required to address the concerns they hear. Thus, the Report suggests that Congress direct non-profit hospitals to specifically address the needs raised by community members, which could be achieved in part by encouraging partnerships with other community resources or health care providers to ensure patients can access free or discounted services.


I have no issue with revising Form 990 and Schedule H to elicit more specific information regarding a hospital organization’s charitable and community activities. The IRS has long used the questions posed by tax returns as a way of informing charitable organizations of what the government expects of them, thereby modifying their behavior.

By engaging in this exercise, the IRS would be forced to prioritize the kinds of activities to which hospitals should be dedicating their resources, rather than leaving them to make that determination. What’s more, this process would engage hospitals and solicit their input based upon their real-life experience.[xli]

Finally, it should eliminate the selective use of privately generated reports that support one view over another; for example, Senator Sanders versus the American Hospital Association. This is not a zero sum game.  

Sign up to receive my blog at
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] P.L. 117-169.

[ii] This post will cover hospitals, but it is my sincere hope that Congress will set its sights on certain universities – I’ll give you my thoughts in other post. I assure you it won’t be pretty.  

[iii]  The letter cited instances from various reports which, the Senators claimed, supported the above statements: “For example, the Community Service Society published a report revealing 56 nonprofit hospitals in New York filed liens on nearly 5,000 patients’ homes in 2017 and 2018. The liens were placed predominantly on homes in poor and rural areas, with nearly 80 percent of the liens occurring in counties with median incomes below 300 percent of the poverty line.”

[iv] The Health, Education, Labor, and Pensions Committee.


The report estimates that tax-exempt hospitals received an aggregate of $28 billion in Federal, state, and local tax benefits in 2020.

[vi] Unless stated otherwise, all “Section” references are to the IRC – the Code, because there can be only one. (Any Highlander film fans out there? Or fans of Queen, whose music was featured in the film?)

[vii] Although Sec. 501(c)(3) hospitals generally are exempt from Federal tax on their net income (IRC Sec. 501(a)), such organizations are subject to the unrelated business income tax on income derived from a trade or business regularly carried on by the organization that is not substantially related to the performance of the organization’s tax-exempt functions. IRC Sec. 511. In general, interest, rents, royalties, and annuities are excluded from the unrelated business income of tax-exempt organizations. IRC Sec. 512(b).

[viii] In general, a deduction is permitted for charitable contributions, including charitable contributions to tax-exempt hospitals (IRC Sec. 170), subject to certain limitations that depend on the type of taxpayer, the property contributed, and the donee organization. IRC Sec. 170(b) and Sec. 509. The amount of deduction generally equals the fair market value of the contributed property on the date of the contribution. Charitable deductions are provided for income, estate, and gift tax purposes.

[ix] In addition to issuing tax-exempt bonds for government operations and services, State and local governments may issue tax-exempt bonds to finance the activities of charitable organizations described in IRC Sec. 501(c)(3). Because interest income on tax-exempt bonds is excluded from gross income, investors generally are willing to accept a lower pre-tax rate of return on such bonds than they might otherwise accept on a taxable investment. This, in turn, lowers the cost of capital for the users of such financing. Both capital expenditures and limited working capital expenditures of charitable organizations described in Sec. 501(c)(3) generally may be financed with tax-exempt bonds. Private, non-profit hospitals frequently are the beneficiaries of this type of financing.

[x] According to the American Hospital Association, as of May 2023, there were 1,235 “investor-owned” hospitals in the U.S. as compared to 2,978 non-government non-profit hospitals.

[xi] A qualifying hospital is treated as a public charity per se. IRC Sec. 509(a)(1) and Sec. 170(b)(1)(A)(iii).

[xii] By the same token, an organization is not charitable if it does not benefit a sufficiently large class or group of people.

[xiii] Rev. Rul. 69–545. The ruling states: “the promotion of health is one of the purposes in the general law of charity that is deemed beneficial to the community as a whole even though the class of beneficiaries eligible to receive a direct benefit from its activities does not include all members of the community, such as indigent members of the community, provided that the class is not so small that its relief is not of benefit to the community.” 

[xiv] This refers to Schedule H to Form 990. The Schedule was introduced in 2008 but five of the six parts of the Schedule were optional for 2008, including Part I dealing with “Charity Care.”

[xv] Exempt organizations are required to file an annual information return, stating specifically the items of gross income, receipts, disbursements, etc. Sec. 501(c)(3) organizations that are classified as public charities – such as a hospital (under IRC Sec. 509(a)(1)) must file Form 990 (Return of Organization Exempt From Income Tax), including Schedule A, which requests information specific to Sec. 501(c)(3) organizations.

Additionally, an organization that operates at least one facility that is, or is required to be, licensed, registered, or similarly recognized by a state as a hospital must complete Schedule H (Form 990), which requests information regarding charity care, community benefits, bad debt expense, and certain management company and joint venture arrangements of a hospital.

An organization described in Sec. 501(c)(3) generally is also required to make available for public inspection for a period of three years a copy of its annual information return (Form 990) and exemption application materials. This requirement is satisfied if the organization has made the annual return and exemption application widely available (for example, on GuideStar).


[xvii] P.L. 111-148.

[xviii] Prior to the Enactment of IRC Sec. 4958 and the intermediate sanctions rules, as part of P.L. 104-168, the IRS faced a similar issue with respect to “self-dealing”-like transactions in the context of public charities (as opposed to private foundations). The intermediate sanctions were introduced to afford the IRS another option for punishing “wrongdoers” short of revoking the charity’s tax exemption. Sec. 4958 applies to so-called “excess benefit transactions” between a tax-exempt hospital and a “disqualified person.” The provision imposes an excise tax on the disqualified person and certain “organization managers.”

[xix] Yes, it’s a pun. I apologize.

[xx] IRC Sec. 501(r). Final regulations were issued in 2014. Reg. Sec. 1.501(r)-1 through -7.

[xxi] IRC Sec. 501(r)(3).

[xxii] IRC Sec. 501(r)(4).

[xxiii] IRC Sec. 501(r)(5).

[xxiv] IRC Sec. 501(r)(6).

[xxv] Reg. Sec. 1.501(r)-2. It should be noted that minor infractions will not be considered a failure if they are inadvertent or are due to reasonable cause. Reg. Sec. 1.501(r)-2(b).

[xxvi] Rev. Proc. 2015-21; Reg. Sec. 1.501(r)-2(c).

Whether a failure is willful or egregious will be determined based on all of the facts and circumstances. A hospital facility’s correction and disclosure of a failure in accordance with the relevant guidance is a factor tending to show that the failure was not willful.

[xxvii] IRC Sec. 4945. The excise tax is $50,000.

[xxviii] Reg. Sec. 53.4959-1(a).

[xxix] Reg. Sec. 53.4959-1(b).

[xxx] Reg. Sec. 53.4959-1(a)(1) and -2, Ex. 3: a hospital organization has two hospital facilities that failed the requirement; the organization is subject to a tax of $100,000.

[xxxi] Computed as provided in IRC Sec. 11 – the corporate income tax, which is imposed at a flat rate of 21%.

[xxxii] Reg. Sec. 1.501(r)-2(d).

[xxxiii] Reg. Sec. 1.501(r)-2(d)(4).

[xxxiv] In fact, it was reported in 2017 that the IRS had revoked a hospital’s tax-favored status because it failed to comply with the requirements of IRC Sec. 501(r).

[xxxv] The letter states that more than half of the approximately 5,000 community hospitals in the country operate as private, non-profit organizations.

[xxxvi] Charity care.

[xxxvii] As I read the Report, I realized I had the Senator’s voice stuck in my head. I thought I was going insane.

[xxxviii] Look how well the floor for distributions by grant-making private foundations works. It doesn’t. Too many of these entities distribute just enough to satisfy the 5% minimum requirement. Their distributions are not commensurate with their financial capabilities.

[xxxix] Let’s flip that around. They don’t have sufficient guidance to help them determine whether they have done enough.

[xl] Query how this would be implemented. Presumably within the parameters of the three-year community needs assessment period under current law.

[xli] It would also leave compensation out of the equation – in fact, a comparison of executive compensation with the degree of community benefit is not necessarily relevant, except for purposes of making political points. If there are issues involving excessive compensation for hospital executives, the intermediate sanctions rules, the excise tax imposed on exempt organizations that pay over $1 million to “covered” employees under IRC Sec. 4960 (introduced by the Tax Cuts and Jobs Act in 2017; see Form 4720, Schedule N), and state non-profit laws are well equipped to address them.