Strengthening Oversight of Tax-Exempt Hospitals: Calls for Clarity and Compliance

Hospitals qualifying as tax-exempt under IRC §501(c)(3) must meet general charitable standards and the Affordable Care Act’s (§501(r)) specific hospital rules. As Nicholas J. Stock II of Foster Swift Collins & Smith explains, these obligations rest on the “community benefit” doctrine established by Revenue Ruling 69-545, which requires tax-exempt hospitals to demonstrate that their operations promote health and serve the community rather than private interests. Hospitals must maintain open access, fair billing, and transparent financial assistance policies, and document compliance with IRS Form 990, Schedule H, and Medicare cost reports.

In May 2025, the Treasury Inspector General for Tax Administration (TIGTA) released Vague and Outdated Guidance Creates Challenges for Tax-Exempt Hospital Oversight, finding that IRS monitoring had declined sharply and identifying significant oversight gaps. TIGTA reported that referrals under the Community Benefit Activity Review dropped by 98% after the IRS narrowed its scope of review. It also found that 142 hospitals should have been reviewed, but were not. TIGTA recommended clarifying the “community benefit” standard, setting more explicit eligibility criteria for financial assistance, improving selection methods, and updating public guidance. The IRS concurred with all recommendations.

The compliance implications are clear: documentation, governance, and transparency are critical. Hospitals should audit community benefit programs, ensure consistent financial assistance policies, and maintain board-level oversight of ACA and §501(r) obligations. 

Stock advises that, because the IRS may intensify audits and public scrutiny, tax-exempt hospitals must substantiate their charitable purpose with defensible evidence and consistent reporting, or risk penalties or the loss of their exemption.