The Updated IRS Form and Schedule H Implications for

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					 The Updated IRS Form 990 and Schedule H:
 Implications for Hospital Trustees
                                    Prepared for:
                    Hospital Association of New York State

                       Keith Hearle, Verité Healthcare Consulting

                   Michael W. Peregrine, McDermott Will & Emery
 The IRS Revised Form 990 for many reasons

   Dated, vague federal “community benefit
   Last substantive 990 revisions in 1979
   Concerns about tax-exempt sector generally
   Hospitals represent 40% of U.S. tax-exempt
   sector (based on revenues):
     – are tax benefits being earned?             2
 The IRS Revised Form 990 for many reasons

   Calls for “Transparency and Accountability”
     – Charge master, billing and collections issues
     – Stakeholder activism
     – “Climate of Skepticism,” in which third parties are less willing
       than before to extend charities the “benefit of the doubt”
   Congressional interest and pressure (politics)
   An accepted hospital community benefit reporting
   framework was available
   Governance concerns                         3
 Why is the IRS so Interested?

   “The IRS believes that a well-governed
   charity is more likely to obey the tax laws,
   safeguard charitable assets, and serve
   charitable interests than one with poor or
   lax governance.”        4
         How IRS Carries Out its Role Re: Governance

   When organizations apply for exemption (Form
   In reporting requirements (updated 990 and
   Schedule H)
     – Number of questions regarding the Board, and
       Board policies more than tripled
   When organizations are examined (audited)
   By providing education              5
                           Implications for Trustees

   The IRS wants to see an “active, independent board”
   governing charities and adopting and enforcing
   specific policies
     – “We have started to act on the principle that
       effective tax-exempt organizations benefit from
       transparency, and from engaged boards.”
     – “People accept the idea that the IRS has a role to
       play in the area of governance.”                        6
          IRS: “An Active and Engaged Board”
   Is composed of persons who are informed and active
   in overseeing operations and finances, and who bring
   needed skills (e.g., finance and ethics)
   Does not tolerate “a climate of secrecy or neglect”
   Is not “too small or too large”
   Is comprised of independent members, not
   dominated by employees
   Has several specified board and management
   policies in place             7
                           Implications for Trustees

   The revised 990 will disclose much more information about the
   organization; Trustees should be aware
   The updated 990 is more complex, requiring greater Board
   involvement in reviewing its contents
   Board role in community benefit-related programs:
     – Designated committee?
     – Needs assessment process: input and review
     – Community benefit program evaluation, priority development,
       budgeting, expenditure monitoring
     – Policy approval (charity care, collections, others)
     – Represent community interests                              8
 “In A Nutshell”
   Boards of Exempt Organizations (“EOs”) should
   assure the implementation of appropriate
   governance safeguards to preserve impartial
   decision-making at board and committee levels,
   in order to address increasing concerns of the
   IRS and of state charity officials         9
 Part IV Issues
   Section A: Governing Body and Management
   Section B: Governance Policies
   Section C: Disclosure

   Also, cross-reference to Schedules O and L;
   Impact of the Final Instructions         10
 Principal Governance Issues
   Number of Voting Members
   Vertical and Horizontal Board Relationships
   Delegation of Management Duties
   Significant Changes to Organic Documents
   Material Diversion of Organizational Assets          11
   Practice of Contemporaneous Documentation
   Board Review of Form 990
   Process Used to Review 990
   Governance Related Policies and Procedures       12
   Process for Reviewing CEO Compensation
   Emphasis on “RPR”
   Written Policy re: Joint Ventures        13
   Schedule O: Provides IRS with narrative
   information required for responses to specific
   questions on Form 990 or to explain the
   organization’s response to various questions.           14
   Schedule L: Provides IRS with information on
   certain financial transactions or arrangements
   between the organization and “disqualified
   persons” or other interested person. Also used to
   determine independence of board member.          15
   Schedule H (Part VI, Question 6): Provide any other
   information important to describing how the organization’s
   hospitals or other health care facilities further its exempt
   purpose by promoting the health of the community or
   communities, including but not limited to:
     • whether a majority of the organization's governing body is
       comprised of persons who reside in the organization's
       primary service area who are neither employees nor
       contractors of the organization, nor family members thereof;                      16
 Principal Governance Themes
   Relationship between Tax Compliance and Tax
   Internal process for preparation and pre-filing
   review of Form 990
   Role of Form 990 as key disclosure vehicle            17
   Transparency of governing documents
   Focus on satisfying “RPR” regarding Executive
   Focus on contemporaneous written
   Adoption of basic governance policies: indicator
   of compliance           18
   Preserving integrity of decision-making process
     – Conflicts
     – Independence
     – Intra-Board Relationships
     – Rebuttable Presumption
     – Schedule L Disclosures          19
   Monitor tax exemption implications of joint
   Sarbanes-like whistleblower policies urged
   IRS remains concerned with potential for abuse
   in charitable sector
   IRS committed to exercising governance
   oversight over charitable organizations           20
   Key Governance Safeguards:
     – Conflicts of Interest Policy
     – Oversight of Intra-Board Relationships
     – Control in “Independent” Members
     – Satisfying the “Rebuttal Presumption”
     – Monitoring Transactions with Interested Persons                 21
                                              Traditional Corporate
                                               Conflicts of Interest

                                                                        Interested Party
                           The Independence                                Disclosure
                             of Governing         An Impartial            Obligations
                            Board Members       Decision-Making

                                         Approval of                Business and
                                  "Disinterested Directors"     Family Relationships
                                       for Rebuttable             (a/k/a "horizontal
                                       Presumption of                 conflicts")
                                      Reasonableness                                                            22