Uncharitable Hospitals: Why the IRS Needs Intermediate Sanctions to Regulate Tax-Exempt Hospitals

Tax-exempt hospitals receive millions of dollars worth of tax breaks each year for the purpose of providing care to their communities. Despite these tax breaks, however, there is little evidence to suggest that such breaks significantly benefit the hospitals’ communities. When a hospital no longer meets the federal standard for tax exemption, the Internal Revenue Service currently has two enforcement options: (1) do nothing; or (2) move to revoke the hospital’s tax-exempt status. Revocation, however, is a harsh option that is not appropriate for every circumstance where a hospital fails to meet one or more of the requirements for exemption. As a result, many tax-exempt hospitals fail to meet the exemption standard but do not have their tax-exempt status revoked. Commentators have recommended modifying the qualifying standard for hospital tax exemption to address this growing problem. This Note takes a different position and argues that Congress should give the IRS statutory authority to impose excise tax intermediate sanctions on underperforming hospitals as an enforcement tool short of revocation. Intermediate sanctions would provide the IRS with the flexibility to regulate the boundaries of a hospital’s tax-exempt status while ensuring that communities continue to benefit from the services of tax-exempt hospitals.