On June 14, 2007, the IRS released for discussion a draft version of revised Form 990, the annual information return required to be filed by tax-exempt hospitals and other tax-exempt healthcare organizations. Although new Form 990 reflects no substantive law changes, by requiring additional information it may nevertheless have a significant impact. The IRS has requested comments by September 14, 2007. The IRS hopes to have the new Form 990 ready to be filed in 2009, for the 2008 tax year.
The new Form 990 is intended to increase transparency and comparability among exempt organizations. To that end, the new Form 990 not only requires typical accounting information, but now requires SEC-type disclosures regarding an organization's activities, compensation, governance and finances.
The format of Form 990 has also changed. It now consists of a Core Form and fifteen (15) schedules. It is anticipated that tax-exempt hospitals will be required to file at least eight (8) of these schedules annually. Healthcare organizations must become familiar with each proposed section of the new Form 990, as different organizations will be required to submit different schedules.
The following sections of the new Form 990 will be relevant to most healthcare organizations:
- The Core Form has been significantly modified. The first page of the Core Form provides a "snapshot" of key metrics regarding the size, independence and compensation of the governing board, including total executive compensation paid as a percentage of overall program service expense; revenue; expenses; assets; and fundraising. The remainder of the Core Form requires information in greater detail regarding compensation; governance; revenues; expenses; balance sheet items; the organization's general activities and exempt functions; and a statement describing "the organization's most significant program service accomplishment for the year."
- The new Schedule H will likely be the most important schedule for tax-exempt hospitals. It requires information regarding Community Benefit, billing information including how the organization calculates bad debt, a description of any written collection policy, and a description of the patient intake process. Schedule H also asks for a description of how the organization assesses the healthcare needs of its community, information about ER policies and procedures, and how the operation of the hospital facilities furthers exempt purposes.
- The new Schedule J requires disclosures regarding "key employee" compensation if certain compensation triggers are met, including if any former Listed Person earned more than $10,000, if any Listed Person earned more than $150,000, or if any Listed Person received compensation from an outside source for services provided to the organization.
- The new Schedule R requires disclosures regarding joint ventures that are more than 50% controlled by the organization or where the organization is the managing or general partner or the managing member. For such joint ventures, the organization must provide information including the nature of the joint venture's activity, assets, revenue, control, transactions, and transfers.
- Other new schedules include: Schedule K - Tax-Exempt Bonds; Schedule N - Liquidation, Termination, Dissolution, or Significant Disposition of Assets; Schedule L - Loans; and Schedule M - Non-Cash Contributions.
Healthcare organizations have already expressed concern that the additional information may amount to free discovery for plaintiffs' attorneys and parties seeking money under Section 7623's whistleblower reward, which was recently increased to 30%. Additionally, the IRS may use disclosures it receives to set Community Benefit benchmarks and identify potential audit targets. Attorneys General may examine the disclosures to identify healthcare organizations not meeting the state law charity requirements.
Perhaps the biggest concern among healthcare organizations is that the additional disclosures will place an even heavier burden on healthcare organizations than currently exists. For example, one question on Form 990 asks whether or not the board has reviewed all Form 990s prepared by the organization. Although there is no requirement that a board review an organization's Form 990, organizations must consider how this information may be used by various parties in a variety of contexts. For an organization whose Form 990 is upwards of 300 pages (as some may be), a board review is no small concern. Thus, when examining the new Form 990 for comment, it is critical that an organization realize the possible ramifications of the public disclosures and consider potentially advantageous changes to operating procedures.
We encourage you to closely examine the new Form 990 and express to the IRS how the proposed changes may impact your organization. The draft Form 990 is available online at www.irs.gov/charities/index.html. Your comments can be emailed to the IRS at Form990Revision@irs.gov or mailed to Form 990 Redesign, ATTN: SE:T:EO, 1111 Constitution Ave., N.W., Washington, DC 20224. Remember, the IRS has set a deadline of September 14, 2007 for submitting comments, so time is of the essence.