Nonprofits forced to reveal more details under new IRS regulations
No one looks forward to tax season, but many hospitals will be facing this one with particular dread.
Beginning with their 2008 tax filing, hospitals and other nonprofit entities must complete a newly expanded Form 990 -- effectively, a 1040 for tax exempt organizations -- that demands more detailed information in areas such as business dealings of its top executives and board members and even some former executives and board members.
If the hospital has affiliated for-profit businesses, the IRS wants to know about them in detail. Do the executives fly first-class on business trips? There's a place for reporting that information. If two board members have a 10 percent stake in the same business, the IRS wants to know that, too -- even if the business has nothing to do with the hospital. More people will have to disclose their salaries.
And the form will grow yet again a year from now, as hospitals will then have to fill out a special Schedule H to document exactly what "community benefit" they contribute to justify their tax-exempt status.
"It is the equivalent of a corporate endoscopy," said local health care attorney Ed Weisgerber of K&L Gates. "It is an incredible undertaking."
"I think it's going to be a monumental task," agreed Melinda Hatton, general counsel for the American Hospital Association. "Not only is it going to take a lot of resources, it's going to take sustained resources from the day-to-day operation of the hospital."
The University of Pittsburgh Medical Center does not expect to hire additional staff, despite the need to verify and disclose more information, said spokeswoman Wendy Zellner. "As part of our existing conflict-of-interest policy, which has been in place for more than a decade, we already collect the governance and board relationship information required by the IRS," she said.
West Penn Allegheny Health System officials declined to comment on the new tax forms.
"Overall I think it's a good thing to have this additional information out," said Mr. Weisgerber. "Nonprofits don't have shareholders and so this is another check and balance in the system to assure that nonprofit boards are doing what they are supposed to be doing, and so the public can scrutinize these activities and hold them accountable."
At the same time, he added, "you're going to chew up a ton of staff time" compiling the information.
From the perspective of the IRS and the public, the new tax form means improved reporting by hospitals and greater transparency of their businesses, says Steven Miller, the IRS commissioner for tax exempt and government entities.
"We will have more accurate information, presented uniformly," Mr. Miller said in a speech in Austin, Texas, last week. "We, the states, and others will have a rich vein of data that will help us see nonprofit hospitals more clearly and allow us to make better informed decisions about them."
Nothing in the federal tax code specifically states that nonprofit hospitals are automatically tax exempt, only that they may qualify for the exemption, he noted. The criteria include meeting a vague "community benefit" standard, plus a prohibition of any private benefit or excess compensation for executives.
"To some, 'community benefit' should be narrowly interpreted to equate with charity care," said Mr. Miller. "To others, it should be broadly construed to encompass virtually everything a nonprofit does. And there are still others that believe it fits somewhere in the midst of these competing interpretations. You and I know it cannot be all these things at the same time."
Even with the new disclosure requirements, some feel the new form doesn't go far enough.
Sandra Miniutti of Charity Navigator, which rates nonprofits, preferred an earlier draft of the Form 990 that would have required hospitals and other tax exempts to state upfront what percentage of their revenue went to administrative costs rather than operations. "A lot of charities indicated they didn't want that front and center," she said.
The charities' objection was that a simple ratio was too simple, said Jack Siegel, an author, attorney and certified public accountant who does consulting work for hospitals. "Aside from the watchdog groups, many people thought they were open to way too much misinterpretation."
That said, Mr. Siegel described the new forms as "a gold mine of information for the public," adding, "I think the IRS went out of its way to make this as painless as possible."
He does think the forms overreach in some disclosure requirements for board members' unrelated business holdings, noting that hospitals will now have to survey board members for the information.
So what happens if board members don't want to disclose their outside business dealings?
"My personal opinion is that there's not a penalty" based on the regulations, said Mr. Siegel. "The question is: [Is the IRS] going to find there's so much noncompliance that we're going to have to pull this back?"
First Published January 20, 2009 7:59 pm