Tax-Exempt Hospitals: Community Benefit Requirement and Risks for Hospitals
Hospitals that qualify under IRC 501(c)(3) must satisfy both general exemption criteria and additional hospital-specific requirements. Exemption under Section 501(c)(3) depends on complying with the so-called “community benefit” doctrine and the ACA’s hospital rules under § 501(r). The Treasury Inspector General for Tax Administration (TIGTA) recently identified gaps in IRS oversight and potential risk for hospitals.[1]
This summary outlines (i) community benefit requirements, (ii) key findings and implications from TIGTA’s examination, and (iii) recommendations for nonprofit hospitals.
I. Key Requirements and Community Benefit Rule for Tax-Exempt Hospitals
General 501(c)(3) Requirements.
Internal Revenue Code Section 501(c)(3) provides, in part, for the exemption from federal income tax of corporations organized and operated exclusively for charitable, scientific, or educational purposes, provided no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
Along with churches and schools, hospitals are among the quintessential types of organizations historically viewed as charitable and therefore exempt from federal income tax. To qualify for formal exemption under Section 501(c)(3), a nonprofit hospital must be organized and operated exclusively for charitable or exempt purposes, ensure that no part of net earnings inures to private individuals, avoid substantial lobbying or political intervention, and directing assets to charitable use upon dissolution.
Community Benefit Standard - Rev. Rul. 69-545.
In addition, tax-exempt hospitals are subject to the community benefit standard set forth in Revenue Ruling 69-545, and the requirements of IRC Section 501(r), enacted as part of the Affordable Care Act (ACA).
Because “promotion of health” is considered an exempt charitable purpose, a hospital must show that it provides benefits to the community (as opposed to private individuals). Hospitals must show that their operations are directed toward and meaningfully benefit community health rather than private benefit. In determining whether a hospital meets the community benefit standard, IRS weighs all relevant facts and circumstances; no single factor is determinative.
Rev. Rul. 69-545 lists illustrative factors such as (i) an open emergency department, (ii) open medical staff policy, (iii) providing care regardless of ability to pay, (iv) reinvestment of surplus into health services/facilities, (v) educating or research, and (vi) community board representation.
ACA § 501(r) Requirements.
In addition to the community benefit standard, each hospital facility must meet four requirements:
- Community Health Needs Assessment (CHNA) and implementation plan every three years.
- A written Financial Assistance Policy (FAP) and Emergency Medical Care Policy.
- Limit charges to eligible patients to amounts generally billed to insured patients and not impose gross charges for eligible patients.
- Reasonable efforts to determine eligibility for assistance before pursuing extraordinary collection actions (e.g., liens, lawsuits, credit reporting).
These rules mean hospitals must (a) document needs and plan responses, (b) adopt fair and transparent policies, (c) ensure billing practices align with policy, and (d) avoid aggressive collections without first assessing eligibility.
Tax-exempt hospitals must annually report both their community benefit and IRC Section 501(r) compliance to the IRS on Form 990, Schedule H, and their uncompensated care to the Centers for Medicare and Medicaid Services (CMS) on the Medicare Cost Report. While promoting transparency, these publicly available reports expose tax-exempt hospitals to public scrutiny.
II. TIGTA Identifies Weaknesses in IRS Oversight
Overview. In May 2025, TIGTA issued a report titled Vague and Outdated Guidance Creates Challenges for Tax-Exempt Hospital Oversight, finding that IRS oversight is constrained by aging guidance and inconsistent selection processes.
Findings. TIGTA discovered that IRS examination referrals via the Community Benefit Activity Review (CBAR) process dropped by 98% from FY 2022 to FY 2024 after IRS revised the scope of its community benefit reviews ‘to focus solely‘ on the ACA's statutorily required standard. TIGTA also identified 142 hospitals that should have been included in the review population but were omitted. Though the IRS agreed with the recommendations and plans to take corrective actions, TIGTA warned that many hospitals might not be reviewed because the IRS fails to correctly identify them or consider their community benefit activities.
Key recommendations of the report included (1) clarifying the community benefit standard, perhaps through legislation, (2) establishing baseline criteria for FAP eligibility, (3) improving IRS selection methodology to identify all hospitals subject to ACA requirements, and (4) updating public guidance to explain exclusions (e.g., dual-status governmental hospitals, church-affiliated hospitals). According to TIGTA, IRS “agreed with all four recommendations and plans to implement corrective actions.”
Risks. The vague definition of "community benefit" in Revenue Ruling 69-545 creates difficulty for both the IRS and tax-exempt hospitals in evaluating whether hospitals are providing sufficient community benefit to justify their tax-exempt status. Hospitals should note that reporting failures or excessive community benefit claims may result in future scrutiny, audit, penalties, or loss of exempt status. Because guidance is still vague, hospitals must be prepared to defend reasonable judgment calls about what constitutes community benefit or financial assistance eligibility.
Implications. Hospitals should anticipate more aggressive IRS scrutiny and audits regarding ACA compliance and community benefit claims. The community benefit standard implicates rules and requirements under the Code, regulations, interpretive authority and case law, including the operational test, private inurement, unrelated business income, and related issues.
These risks and questions often increase in complexity and importance when for-profit entities or activities are involved. Activities that do not further exempt purposes must be an insubstantial part of the organization’s activities. See Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 283 (1945) (a single non-exempt purpose, if substantial, will destroy the exemption regardless of the number or importance of exempt purposes).
A § 501(c)(3) organization may form and participate in a partnership and meet the operational test if (1) participation in the partnership furthers a charitable purpose, and (2) the partnership arrangement permits the exempt organization to act exclusively in furtherance of its exempt purpose and only incidentally for the benefit of any for-profit partners. Rev. Rul. 98-15, 1998-1 C.B. 718.
But the operational standard is not satisfied merely by whatever charitable benefits a partnership may produce”; ceding effective control of partnership activities to a for-profit partner or joint venture impermissibly serves private interests. Redlands Surgical Services, 113 T.C. 47, 92-93 (1999), aff’d 242 F.3d 904 (9th Cir. 2001). A non-profit partner will lose tax-exempt status if it loses the “capacity to ensure that the partnership’s operations further charitable purposes.” St. David’s Health Care System v. United States, 349 F.3d 232, 236-237 (5th Cir. 2003).
Hospitals should also review peripheral or ancillary activities for which the hospital has claimed a community benefit. Inconsistencies among hospitals in interpreting benefit standards may lead to comparative audits. It is crucial to document all review and compliance decisions.
III. Recommendations for Hospitals
- Documentation & Oversight. Hospitals should conduct board-level reviews of CHNAs, FAPs, billing/collection policies, and community benefit allocations. Boards should require written analyses (including quantitative and narrative support) behind community benefit claims and FAP eligibility criteria, including questions, benefits, and reasoning. Evaluate all prospective planning, transactions, and material contracts and economic arrangements so that tax-exempt hospital maintains sufficient control over compliance and protection against violations of charitable or community benefit requirements.
- Reviews and Planning. Undertake a prospective audit of current operations against ACA requirements and community benefit standards. Identify weak spots (e.g. collections before eligibility screening, overly narrow FAP eligibility, inconsistent community program attribution). Develop mitigation or documentation procedures to address any identified weaknesses.
Engage & Communicate. After taking measures to ensure compliance, hospitals should consider communicating their community benefit narrative, transparency efforts, and exempt activities to address public and legislative concerns. Engage local leaders, publish clear narratives consistent with Schedule H data, and consider external reviews or validations of benefit metrics.
[1] TIGTA Audit Report No. 2025-100-019, 5/15/2025
