Tax-Exempt Status Under Fire: What Nonprofit Healthcare CFOs Need to Know

​Nonprofit hospitals in the United States have long enjoyed tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, a designation that hinges on their commitment to providing community benefits. However, recent developments indicate that these institutions are under increasing scrutiny from federal and state authorities regarding the adequacy of the community benefits they provide relative to the tax exemptions they receive. For Chief Financial Officers (CFOs) of these healthcare systems, understanding the evolving landscape is crucial to ensure compliance and safeguard their organization's tax-exempt status.

The Basis for Tax-Exempt Status

To qualify for tax exemption, nonprofit hospitals must meet the "community benefit standard" established by the Internal Revenue Service (IRS). This standard requires hospitals to engage in activities that benefit the community, such as providing charity care, health education, and community health improvement initiatives. The Affordable Care Act (ACA) further codified these expectations by introducing Section 501(r), which mandates that hospitals conduct Community Health Needs Assessments (CHNAs) every three years and implement strategies to address identified needs. Noncompliance with these requirements can result in excise taxes or even revocation of tax-exempt status.

Escalating Scrutiny

In recent years, there has been a bipartisan push to reassess the tax-exempt status of nonprofit hospitals. Lawmakers and regulators are questioning whether the level of community benefits provided justifies the substantial tax breaks these institutions receive. For instance, a 2020 report by the Government Accountability Office (GAO) highlighted deficiencies in the IRS's oversight of hospitals' tax-exempt status, prompting calls for more rigorous enforcement.

Moreover, specific cases have brought this issue to the forefront. In Indiana, legislation was proposed to revoke tax exemptions for nonprofit hospitals that charge patients more than 200% of Medicare rates, following investigations into high pricing practices. Similarly, in Pennsylvania, the tax-exempt status of certain hospitals has been challenged based on the adequacy of their community benefit contributions.

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Implications for CFOs

Given this heightened scrutiny, CFOs of nonprofit healthcare systems must be proactive in several key areas:

1. Comprehensive Documentation: Ensure meticulous documentation of all community benefit activities, including charity care, community health improvement services, and educational programs. This information should be accurately reported on IRS Form 990, Schedule H, to reflect the organization's commitment to community service.
2. Regular CHNAs: Adhere strictly to the ACA requirement of conducting CHNAs every three years. Develop and publicly disclose implementation strategies that address the identified health needs, demonstrating a clear link between assessment findings and community benefit initiatives.
3. Financial Assistance Policies: Maintain transparent and accessible financial assistance policies. Ensure that these policies are widely publicized and that eligibility criteria are clear, facilitating access to care for underserved populations.
4. Stakeholder Engagement: Engage with community stakeholders, including public health departments and local organizations, to align hospital initiatives with community health priorities. This collaboration not only enhances the effectiveness of programs but also reinforces the hospital's role as a community-focused institution.
5. Board Oversight: Educate board members about the importance of community benefit activities and the potential risks associated with non-compliance. Regularly update the board on community benefit performance and regulatory developments to ensure informed governance.

Safeguarding Tax-Exempt Status

The tax-exempt status of nonprofit hospitals is increasingly under the microscope, with regulators and legislators seeking greater accountability and tangible community benefits. For CFOs, this environment necessitates diligent compliance with federal requirements, robust documentation, and active engagement with community health needs. By prioritizing these areas, nonprofit healthcare systems can continue to fulfill their charitable missions while preserving the financial advantages of tax-exempt status.​

Disclaimer: This blog post is for informational purposes only and does not constitute legal or financial advice. Healthcare organizations should consult with legal and tax professionals to address specific compliance issues.

Sources

1. “Hospital Community Benefit Policy Watch” - Lown Institute: https://lowninstitute.org/hospital-community-benefit-policy-watch/
2. “How tax-exempt hospitals can prepare for increased IRS scrutiny” - The Real Economy Blog: https://realeconomy.rsmus.com/how-tax-exempt-hospitals-can-prepare-for-increased-irs-scrutiny/
3. “The Future of Non-Profit Hospitals: How New Charity Rules Could Shape What’s Next” - American Bar Association: https://www.americanbar.org/groups/health_law/resources/esource/2025-january/future-of-nonprofit-hospitals-charity-care-rules/
4. “Charitable hospitals - general requirements for tax-exemption under Section 501(c)(3)” - IRS: https://www.irs.gov/charities-non-profits/charitable-hospitals-general-requirements-for-tax-exemption-under-section-501c3
5. “Tax Administration: IRS Oversigh of Hospitals’ Tax-Exempt Status” - U.S. Government Accountability Office: https://www.gao.gov/products/gao-23-106777
6. “Indiana bill seeks to end tax breaks for non-profit hospitals that overcharge patients” - The Guardian: https://www.theguardian.com/us-news/2025/jan/22/indiana-bill-tax-breaks-non-profit-hospitals-parkview
7. “Commonly Asked Questions About Community Benefit” - Catholic Health Association of the United States: https://www.chausa.org/docs/default-source/community-benefit/cha_cb_guidefortalkingaboutcb_v04_24_23.pdf?sfvrsn=f30dc2f2_2
8. “Requirements for 501(c)(3) hospitals under the Affordable Care Act – Section 501(r)” - IRS: https://www.irs.gov/charities-non-profits/charitable-organizations/requirements-for-501c3-hospitals-under-the-affordable-care-act-section-501r