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June 4, 2008

Preparing for the New IRS 990: It’s No Longer Just a Finance Document

The newly revised IRS Form 990, with its sixteen accompanying schedules, has been transformed from a mostly finance document to a comprehensive snapshot of an organization’s operations, governance, compensation, policies and community benefits. The new form will require input from many departments of the hospital, not just finance. Hospitals need to begin now to assess their current policies and to determine how best to respond to the many new questions. The new form is applicable to the 2008 tax year, reportable in 2009.

The IHA held a program in May to assist members in preparing for this important process, and the following information highlights some key areas hospitals should begin analyzing now. A hospital that had in the past relied on its audit firm to complete this form will find it needs to respond to a majority of the questions internally. In particular, the new Schedule H – Hospitals, will need significant attention as it requires data on community benefits, charity and bad debt policies, and other important information that shows how the hospital is meeting the needs of its community and meeting the standards for tax exemption.

Throughout the process of completion, hospitals need to be aware of possible readers of this document, which could include the media and legislators as well as the general public, and how the hospital responses will be perceived. The IRS Form 990 is a public document and is typically posted on the web site www.guidestar.org.

Governance
The hospital board needs to become involved in the review of this document because Part VI of the Core Form asks if a copy of the Form 990 was provided to the governing body before it was filed. Hospitals will want to be able to answer "yes". This will require attention to the Board’s meeting schedule. In addition, management should review the Form’s major components to ensure the Board’s understanding and to answer questions.

Question 2 of Part VI expands a question previously asked on the Form 990: "Did any officer, director, trustee, or key employee have a family relationship or a business relationship with any other officer, director, trustee, or key employee?" That question alone will require significant attention as hospitals develop a list of personnel and their personal or business relationships, if any, to one another. In addition, questions are asked about the organization’s whistleblower, conflict of interest and document retention and destruction policies.

Compensation questions in the Core Form and Schedule J will certainly need attention, with the expansion of information requested and the move to calendar year reporting.

Schedule H
Much of this new Schedule H is optional for 2008, with the complete Schedule H required for 2009. IHA recommends hospitals complete the entire document for 2008 for internal purposes of review and analysis, but only file Part V with the IRS for 2008, which is required.

A number of questions are asked about the hospital charity and discount policy and if eligibility for charity is determined based upon income as a percentage of Federal Poverty Level (FPL). This will now allow easy comparisons among hospital charity policies and hospitals should review to ensure their policy meets the needs of their community.

Hospitals not currently reporting community benefits will need to establish procedures to collect this information. The worksheets included in the instructions are modeled after the Catholic Hospital Association guidance on community benefits. Note that the chart in Part I has a column for number of activities and persons served, which is optional. Be aware that if this column is completed, it must be extremely accurate, as readers may calculate ratios of cost per person or activity. As such, there is potential for drawing incorrect conclusions about benefits provided.

Bad debt and Medicare shortfalls are not included in the Community Benefit chart, but are to be documented in Part III. The questions address how much of bad debt could be considered applicable to patients potentially eligible for charity and how much of the Medicare shortfall should be considered community benefit. These questions are in response to many in the hospital community, including the IHA and the AHA that believe these costs belong in the Community Benefit chart. The IRS chose not to include bad debt and Medicare shortfalls in the chart, but has stated publicly the importance of gathering such information. Including this information in Part III represents an opportunity for hospitals to show the significant value they bring to their communities.

Hospitals should be familiar with HFMA Statement 15 which discusses accounting treatment for charity care and bad debt, as the form questions if the hospital reports bad debt in accordance with Statement 15.

Part VI Question 6 is of particular importance for hospitals to describe their organization and how they meet the community benefit standard for tax exemption. For hospitals in complex corporate structures, this is where they can also point to other IRS Form 990s filed by its system.

For a complete listing of the new IRS Form 990, its accompanying schedules, instructions and worksheets click here. Additional information can be found on the IHA web site (click here).

If you have any questions, please contact Sandy Kraiss at skraiss@ihastaff.org or 630-276-5522.