IRS Goes Hollywood

Customer Education and Outreach, including Form 990 compliance, has been a major push of the IRS' Exempt Organization Division. To that end, they have recently released a series of videos (yes, really, videos) to help organizations understand the new Form 990. While it's easy to poke fun of any video series produced by the Internal Revenue Service and dedicated to completing a tax form, they have good production values and are informative. That said, I'd leave the popcorn at home. http://www.irs.gov/charities/article/0,,id=210358,00.html

Conference Board Task Force Releases Report on Executive Compensation

The Conference Board recently released its Report on Executive Compensation. While the report focuses on large publicly traded organizations, its recommendations are equally relevant to healthcare organizations. Among its recommendations for CEO compensation programs are the following:

• Compensation programs should drive a company’s business strategy and objectives and create shareholder (or community) value, consistent with an acceptable risk profile and through legal and ethical means. This means a significant portion of pay should be incentive compensation.
• Total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution and fair to shareholders and employees.
• Companies should avoid practices such as multi-year employment agreements providing generous severance payments, gross-ups for tax consequences and benefits that are not generally available to other managers.
• Credible board oversight of executive compensation is critical.
• Compensation should be transparent, understandable and effectively communicated.

Interestingly, the report highlighted the fact that the median total annual compensation for CEOs dipped by less than 1% in 2008 (compared to the S&P 500 index which dropped nearly 40%).

The report can be found at http://www.conferenceboard.org/pdf_free/ExecCompensation2009.pdf

Worker Classification in the News...Again

The GAO and Congressional Research Service released a report suggesting that the federal government stands to collect more than a billion dollars in taxes if the IRS is successful in its efforts to re-classify workers as employees rather than independent contractors. Using old data, the report stated that 15% of employers misclassified 3.4 million workers as independent contractors rather than as employees, causing an estimated total loss of $1.6 billion in taxes. It included 19 specific recommendations for reducing employee misclassification, among them:

• Clarify the distinction between employees and independent contractors under federal law.
• Ensure that workers have adequate legal protection against retaliation after filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
• Define misclassification as a violation under the Fair Labor Standards Act (FLSA).
• Lift the ban on IRS/Treasury issuing regs or revenue rulings clarifying the employment status of individuals for purposes of employment taxes.
• Require service recipients to provide standardized documents to workers that explain their classification rights and tax obligations.
• Create an online classification system to guide service recipients and workers on classification determinations.
• Require service recipients to withhold taxes for independent contractors whose TINs IRS cannot verify, or who the IRS has determined are not fully tax compliant.
• Require universal tax withholding for payments made to independent contractors, using tax rates that are relatively low (e.g., 1% to 5% of payment amounts).
• Require each independent contractor to apply for a separate business TIN.
• Enhance coordination between IRS, DOL, and other federal agencies to share data and address misclassification.

Given the number and extent of relationships hospitals and healthcare systems have with outside providers, they have always been subject to scrutiny in this area. We have yet to be involved with an employment tax audit for a hospital where the IRS hasn’t found some grounds of employee misclassification. Areas of particular risk include:

• Medical directors
• Nighthawks
• Former employees
• Interim management

For any independent contractor relationship, if you don’t have a clear and convincing argument as to why they should be classified as independent, you risk a challenge as the IRS again increases its scrutiny.

CEO Personally Responsible for Payroll Taxes

Several years ago, the Granada Hills Community Hospital in Florida entered into bankruptcy and, as a result, hired a turn-around firm to assist them through the process. The firm brought in a consultant who acted as the hospital’s interim president and was "vested with the responsibilities incumbent upon those offices", including the remittance of payroll taxes. Unfortunately, Mr. Doulgeris chose to make payments to creditors rather than submit those funds as payroll deposits. During testimony, he admitted that he knew that the taxes were due and that his decision to pay creditors was willful. The court found him personally liable for $1,935,204.33 in payroll taxes which were not deposited.

This case serves as a potent reminder that the officers and directors of hospitals who are experiencing financial adversity should pay close attention to the responsibilities of the hospital to continue to make its payroll deposits. The stakes are obviously very high.

The case can be found at: James Doulgeris v. United States; No. 8:08-cv-00282 (3 August, 2009)

The Real Cost of a Stark Violation

Covenant Medical Center has agreed to pay the United States $4.5 million to resolve alleged Stark law violations. The charges stem from compensation made by Covenant to several high producing physicians. A review of Covenant's Form 990s show that, for tax year 2002, two orthopedic surgeons and a gastro-intestinal specialist made $2.14 million, $1 million, and $2.1 million respectively. It is not clear from the press release whether Covenant had obtained reasonableness opinions for any of these compensation arrangements - and, if so, whether the Department of Justice relied on those opinions as evidence of reasonableness. It's also not clear whether the Internal Revenue Service will follow-up with an "intermediate sanctions" claim - but one would imagine that the Covenant board of directors has pointedly asked this question. Covenant has specifically not admitted any wrongdoing (through its own press release).

A quick search on Google reveals that at least 60 different news sources have picked up this story to date. As such, the real long-term damage done to Covenant and its reputation in the community may go far beyond the $4.5 million fine.

Study on Nonprofit Nursing Homes Quality of Care

A Canadian study by clinical researchers has determined that nonprofit nursing homes provide a higher quality of care than their for-profit counterparts. The comprehensive study relied on the following as metrics for what constitutes good or poor quality of care: number of staff per resident, physical restraints, pressure ulcers and regulatory deficiencies. While many healthcare systems have divested themselves of ownership in long term care facilities, they still play a part in many of the systems we work with. The study can be found at http://pnhp.org/nursing_home/nursing-homes.pdf.

More From the IRS on Independent Contractors

Ever vigilant in its quest to educate and enforce the rules regarding independent contractors, the Internal Revenue Service has just issued Notice 989, (http://www.irs.gov/pub/irs-pdf/n989.pdf) providing answers to commonly asked questions related to what to do when the IRS determines your work status is employee. The subject matter of this notice is not terribly surprising given the increased activity we have seen from the IRS in challenging independent contractor relationships. The notice does address some of the more vexing challenges created when an individual has been treated as an independent contractor for part of the year, and an employee for the rest of the year.