Richard A. Speizman
The final version of the revised form appears to be an improvement over the June 2007 discussion draft, but will nonetheless add to the reporting burdens of hospitals and other healthcare providers.
On December 20, 2007, the Internal Revenue Service released the final version of its revised Form 990, "Return of Organization Exempt from Income Tax," for use in tax years beginning in 2008. While the released copy is marked "Draft," the IRS has referred to the form as "final."
The new form-and the guidance issued with the form-is dense and lengthy. It would not be possible to provide a detailed analysis of the entire form in an article of reasonable length. Accordingly, this article provides a brief overview of the entire form, together with a more detailed analysis of areas likely to be of particular interest to healthcare providers.
Form 990 is a publicly-disclosed "information return," intended to provide the government and other stakeholders with information the IRS believes is relevant. The form, which had not been significantly revamped since 1969, was redesigned, according to the IRS, because it has "failed to keep pace with changes in the law and the increasing size, diversity, and complexity of the exempt sector" (Form 990 Redesign for Tax Year 2008, Background Paper, IRS, Dec. 20, 2007). As a result, the IRS believes that "the current form fails to meet the (IRS's) tax compliance interests or the transparency and accountability needs of the states, the public, and local communities served by the organization" (Ibid).
The new form appears to be designed to do at least two things, in addition to collecting information necessary to administer the tax law:
- Allow the IRS to assess the risk presented by the organization. For example, failure to adopt policies and procedures that the IRS believes to be best practices may suggest to the government that there is a heightened risk of noncompliance, requiring more extensive scrutiny.
- Provide more transparency to the public and other regulators, to increase the pressure on organizations to operate in a manner considered by the IRS to be appropriate.
Organizations should keep the varied purposes of the form in mind when making resource allocation and other decisions involving tax compliance.
Prior to release of the final 2008 Form 990, the IRS issued, in June 2007, a "discussion draft" of the form for public comment. The IRS received over 650 public comments on the discussion draft. The discussion draft was significantly modified, in large part in response to these comments and behind-the-scenes efforts by various groups.
The IRS has yet to issue instructions to the 2008 Form 990, or certain worksheets that will be necessary to complete the form. It intends to issue draft instructions relatively early in 2008. The instructions may be issued piecemeal, to allow the IRS to expose the newest, most complex or most controversial instructions to public scrutiny as early as possible.
The 2008 Form 990 is designed to capture most of the information required by the 2007 Form 990 (plus significant amounts of additional data). It does this, however, in a completely redesigned manner. The 2007 Form 990 consists of a form and two schedules. The 2008 Form 990 consists of an 11-page "core" form that must be completed by all filing organizations. In addition, there are 16 schedules that must be completed by those organizations to which they apply. See Exhibit 1, showing the parts of the core form.
As stated previously, a key feature of the new form is 16 schedules that may or may not apply to a particular organization. Healthcare systems and academic medical centers in particular should keep in mind that, while not all schedules are relevant to hospital entities, they may be relevant to other tax exempt entities in the system (e.g., "parent" entity, medical or allied health professions school, fund-raising foundation, title holding company).
Schedule H is to be prepared solely by "hospitals." It has been substantially modified from the version contained in the discussion draft.
In response to comments that the discussion draft provided an overly-broad definition of hospital, the IRS has stated that the instructions will define hospital by reference to state licensing or certification. This would require completion of this schedule by hospitals that are "divisions" of a larger legal entity that is not primarily a health care provider (e.g., a university). The IRS is considering whether an additional category is necessary to capture all section 501(c)(3) organizations providing hospital or medical care.
Schedule H is divided into six parts.
Part I: Charity Care and Certain Other Community Benefits. Begins with questions regarding charity care policies and their implementation, and a question regarding the preparation of annual community benefit reports. This is followed by a community benefit table based on the Catholic Health Association/VHA model. Preparing this table requires the use of worksheets which have yet not been released in final form.
Part II: Community Building Activities. Provides for the reporting of items such as physical improvements and housing, economic development, community support, etc.
Part III: Bad Debt, Medicare, and Collection Practices. Covers bad debt expense and Medicare, and how they relate to community benefit. There is a two-part question on collection practices. The comprehensive billing table included in the discussion draft is not included in the final form.
Part IV: Management Companies and Joint Ventures. Focuses on management companies and joint ventures with officers, directors, trustees, key employees and physicians. Some joint ventures reported here may also have to be reported on Schedule R.
Part V: Facility Information. Requires a listing of the different facilities owned by the filing entity, and some classification information (e.g., is it a licensed hospital, does it maintain a 24 hour emergency room?).
Part VI: Supplemental Information. Requires answers to a number of questions, including questions regarding community needs assessments, patient education, financial assistance, and any health system of which the filing entity is a part. Of importance, this part includes the following question:
"Provide any other information important to describing how the organization's hospitals or other healthcare facilities further its exempt purposes by promoting the health of the community (e.g., open medical staff, community board, use of surplus funds, etc.)."
The importance of this question is discussed below.
The IRS agreed that many organizations will need additional time to complete the Schedule H for the first time, and so, decided phase in Schedule H. For tax years beginning in 2008, only Part V must be completed. All of Schedule H must be completed for tax years beginning in 2009.
Part VII of the Core Form and Schedule J
Part VII of the core form and Schedule J both deal with the reporting of compensation. Both contain modifications resulting from comments on the discussion draft.
Part VII requires, for each person for whom reporting is required, reportable compensation from the filing entity's Form W-2 or 1099, reportable compensation from related organizations, and an estimated amount of "other compensation" (e.g., retirement plan benefits; nontaxable fringe benefits) from the organization and related organizations. Persons from whom reporting is required include the following:
- Current officers, directors, trustees (whether individuals or organizations) and key employees
- The five current highest compensated employees (other than officers, directors, trustees and key employees) who received reportable compensation of more than $100,000 from the organization and any related organizations
- Former officers, key employees, or highest compensated employees who received more than $100,000 of reportable compensation from the organization and related organizations
- Former directors and trustees who received, in the capacity as a former director or trustee of the organization, more than $10,000 of reportable compensation from the organization and related organizations
In addition to providing the information required in Part VII, the organization will have to complete Schedule J for any person listed in Part VII that is a former officer, director or trustee, key employee or highest compensated employee; individual for whom the sum of reportable compensation and other compensation from the organization and related organizations exceeded $150,000; or person receiving compensation from an unrelated organization for services rendered to the organization.
Schedule J requires more detailed compensation information than does Part VII of the core form. Part I of the schedule consists of questions, regarding, for example, first class or charter travel, tax indemnification and gross-up payments, housing allowances, and health or social club dues; expense reimbursement policies and substantiation procedures; methodology for establishing CEO/executive director compensation; severance pay and supplemental non-qualified retirement plans; and non-fixed payments.
Part II is a schedule for reporting, for each individual whose compensation must be reported on Schedule J:
- Base compensation Bonus and incentive compensation
- Other compensation
- Deferred compensation
- Nontaxable benefits (not including de minimis fringe benefits or nontaxable expense arrangement amounts)
- Compensation reported on prior returns (e.g., deferred compensation)
This schedule requires detailed information on outstanding tax exempt bonds. Part I requests general information with respect to all outstanding bond issues issued after 2002 with an outstanding principal amount in excess of $100,000. Part II generally requests information regarding the use of proceeds from each bond issue. Part III asks questions regarding private business use. Part IV is concerned with arbitrage.
In response to numerous comments, the IRS has agreed to phase-in Schedule K. Accordingly, only Part I must be completed for tax year 2008. All parts of Schedule K must be completed for tax year 2009.
What to Do Now?
For most tax-exempt hospitals and other health care providers, the new form will result in increased complexity and administrative burden, particularly once it is fully-implemented. Form 990 filers should begin now to develop a plan to ensure that they are able to collect and provide the information required by the new form, in a manner that puts the organization in the best possible light. In particular, organizations should consider the followingactions:
- Educate relevant members of staff, management, and the board about the new requirements.
- Establish a task force, with representatives from relevant parts of the organization (e.g., finance, legal, human resources, appropriate outside advisors) to evaluate the new form and identify shortcomings in the organization's ability to comply with its requirements.
- Determine whether the organization should adopt changes in its policies and procedures for policy and procedure questions on the form for which there is no relevant tax law requirement, and to which the organization cannot currently provide the "correct" answer (as likely viewed by the government and the general public).
- Determine whether the organization has the personnel and systems in place to provide the new information required by the form, and make corrections or add resources as necessary.
- Consider the extent to which the Form 990 should be reviewed by upper management and the board before it is filed.
Much emphasis today is placed on indigent care and "community benefits" (as defined, e.g., by the American Hospital Association and the Catholic Health Association). Yet, to date, the IRS has not changed its current written positions on the requirements for tax-exempt status for hospitals. For example, Rev. Rul. 69-545, 1969-2 C.B. 117 sets forth a facts-and-circumstances test for determining whether a hospital is a charitable organization on the basis that it promotes health under an interpretation of the law of charitable trusts. Factors cited favorably in the revenue ruling include treatment of patients in the emergency room, regardless of ability to pay; admission to the hospital of paying patients, regardless of source of payment (e.g., private or governmental insurance), open medical staff, community board, and use of surplus funds to further hospital operations. There is no indigent care requirement except with respect to emergency care.
The next shoe to drop may be a change in the IRS's official position on the requirements for tax-exempt status. Alternatively, there could be a legislative "solution." Perhaps it would be appropriate to add to the rationales for changing the Form 990, discussed above, that this is partially an exercise in determining whether the tax law standards should be changed. This is yet another thought to bear in mind when pondering the consequences of the new Form 990.
Richard A. Speizman is partner-in-charge, exempt organization tax group, KPMG LLP, Washington, and is a member of HFMA's Maryland Chapter (firstname.lastname@example.org).
Publication Date: Saturday, March 01, 2008