Tax-Exempt Hospitals: IRS Issues Proposed Revenue Procedure to Correct and Disclose Failure to Meet 501(r) Requirements

Saul Ewing Arnstein & Lehr LLP


The Internal Revenue Service (“IRS”) on December 30, 2013 issued a proposed revenue procedure that outlines steps to correct and disclose failures to meet the requirements of new section 501(r) of the Internal Revenue Code (“Code”).1 As long as the failure is not “willful or egregious,” a charitable hospital that follows the correction and disclosure procedure will be excused from the failure.


New Code section 501(r), enacted as part of the Patient Protection and Affordable Care Act (“ACA”), imposes additional requirements on charitable hospital organizations to maintain their tax exempt status under section 501(c)(3) of the Code. A link to our earlier analysis of Code section 501(r) is available here and here.

On June 26, 2012, the Department of the Treasury (“Treasury”) and the IRS issued proposed regulations covering many of the requirements of section 501(r) (“2012 Proposed Regulations”) other than those regarding the community health needs assessment (“CHNA”).

On April 5, 2013, the Treasury and the IRS issued another set of proposed regulations under section 501(r) (“2013 Proposed Regulations”) covering the CHNA requirements, the reporting requirements under amended Code section 6033, and the excise tax provisions added under Code section 4959. In addition, the 2013 Proposed Regulations discuss the consequences of not meeting the requirements of section 501(r). The 2013 Proposed Regulations also provide that a hospital organization’s failure to meet one or more of the requirements of section 501(r) that is neither willful nor egregious will be excused if the hospital organization corrects the failure and makes disclosures in accordance with additional guidance to be issued by the Treasury and the IRS.2

The proposed revenue procedure is the draft of that guidance.

Scope of Proposed Revenue Procedure

Reliance: In order to be protected by the revenue procedure, the hospital organization must begin correcting and disclosing the failure before it is contacted by the IRS regarding an examination. If the due date (including extensions) of the hospital organization’s Form 990 has not passed, then it need only begin correcting the failure.

Willful or Egregious Failure: A willful failure includes one that is due to gross negligence, reckless disregard or willful neglect. The definition of egregious is not addressed.

Correction of Failure

The correction must adhere to the following principles:

  • Restoration of affected persons: to the extent reasonably possible, each person should be placed in the position that he/she would have been in had the failure not occurred.
  • Reasonable and appropriate correction: given the nature of the failure, there may be more than one reasonable and appropriate action to correct the failure.
  • Timing: as promptly as possible after the discovery of the failure.
  • Implementation/modification of safeguards: if the hospital organization does not have appropriate procedures to ensure compliance with section 501(r), it should adopt them, and if there was a failure of the procedure, the hospital organization should make changes to assure future compliance.

Disclosure of Failure

The hospital organization must report on Schedule H of its Form 990 in the year of the discovery the following:

  • A description of the failure
  • A description of the discovery
  • A description of the correction
  • A description of the practices and procedures that were changed or adopted to minimize the likelihood of future failures

Although correction and disclosure of a failure does not create a presumption that the failure was not willful or egregious, the proposed revenue procedure states that correction and disclosure in accordance with these provisions will be considered by the IRS and may tend to indicate that an error or omission may not have been willful or egregious.

The IRS is soliciting comments to the proposed revenue procedure so that it can issue guidance in final form.

1. The complete text of IRS Notice 2014-3 may be found at

2. In a separate notice, Notice 2014-2, the IRS stated that hospital organizations may rely upon the 2012 Proposed Regulations and the 2013 Proposed Regulations until final or temporary regulations or other applicable guidance is issued. The complete text of that notice may be found at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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