The IRS Takes Action on RHIO Tax-Exemption Applications; Offers Guidance to New RHIOs
After a long period of inaction, the Internal Revenue Service (IRS) has recently begun issuing Section 501(c)(3) determination letters to regional health information organizations (RHIOs). The IRS has also released a series of frequently asked questions (FAQs) regarding RHIOs on its Web site. Together, these moves represent the first action by the IRS regarding RHIOs in over two years, during which tax-exemption applications for RHIOs and other organizations engaged in health information exchange activities had languished at the IRS national office, and also offer some guidance to new RHIOs seeking qualification under Section 501(c)(3).
Generally, a RHIO is dedicated to facilitating the exchange of health information and technology to improve the safety, quality, accessibility, availability and efficiency of health care within a particular community. More specifically, a RHIO serves to enable health care providers and community residents to conveniently share and access patients’ clinical data, i.e., a patient’s electronic health records (EHR) more effectively and efficiently, and may act as a central health data collection agency. The activities of a RHIO may also include education and research projects, as well as creating and operating secure communication systems that support the exchange of health information, data and studies.
While the IRS had previously recognized some RHIOs as Section 501(c)(3) organizations, the agency had over the past two years delayed the determination of tax-exempt status for all RHIOs. Part of this delay may have been due to new RHIOs that hastily filled out exemption applications without full consideration of what is required to achieve recognition of Section 501(c)(3) status, specifically whether the organizations’ activities furthered one or more of the purposes enumerated in Section 501(c)(3). As a result, the IRS had flagged all RHIO tax-exemption applications and transferred them to the national office, pending final review. The IRS issued numerous statements over the past two years stating its intention to act on the pending RHIO tax-exemption applications; but, until recently, it had taken no definitive action.
IRS takes action
In addition to issuing Section 501(c)(3) determination letters to at least two RHIOs—CalRHIO in California and CareSpark in Tennessee—the IRS also recently posted a series of FAQs on its Web site regarding RHIOs. (See Regional Health Information Organization (RHIO) Frequently Asked Questions.)
The FAQs are short and light on detail, but they do clarify that the IRS’ decision to take action on RHIO Section 501(c)(3) tax-exemption applications stems from the passage of the American Recovery and Reinvestment Act of 2009 (the Act), which contained a number of provisions providing funding to encourage the proliferation of the use of health information exchange and technology and, in some cases, mandating the use of EHRs. For more information regarding the Act, health information technology and EHRs, please see our Feb. 2009 advisory: "Carrots and Sticks: The Stimulus Package Promotes Health Information Technology."
Tax exemptions based on lessening the burdens of government
In the FAQs, the IRS notes that by passing the Act, Congress “recognized that facilitating health information exchange and technology is important to the delivery of health care and reducing the costs of health care delivery and administration.” The IRS also points to legislative history of the Act, which acknowledges that organizations such as RHIOs that are formed to facilitate the exchange of health information and technology may qualify as Section 501(c)(3) organizations specifically because they lessen the burdens of government.
While RHIOs may qualify for Section 501(c)(3) status on several different legal bases, including the promotion of health, engaging in scientific research and/or engaging in charitable activities by providing services below cost, the IRS’ decision to recognize lessening the burdens of government as an independent basis by which some RHIOs may qualify for Section 501(c)(3) status represents an important move by the IRS and may be attractive to some RHIOs whose activities may not clearly further one of the other purposes described in Section 501(c)(3).
Pending and future RHIO tax-exemption applications
The FAQs indicate that the IRS is in the process of reviewing all pending and new RHIO tax-exemption applications in light of Section 501(c)(3) requirements and the Act and expects to process most of the pending RHIO tax-exemption applications in the next several months. The IRS states that it will issue Section 501(c)(3) determination letters to RHIOs based upon the facts and circumstances set forth in each RHIO’s tax-exemption application, so the IRS’ willingness to take action on pending and new RHIO applications does not guarantee that a RHIO will necessarily qualify for Section 501(c)(3) status. Rather, every RHIO will still need to comply with all the requirements for qualification for Section 501(c)(3) status and will also need to consider carefully how its activities specifically further one or more of the purposes described in Section 501(c)(3), including whether its activities may lessen the burdens of government.