With another income tax season in the books, it may be time to look into the other tax liabilities to ensure compliance with all levels of the tax code. A recovery audit for taxes can reveal a variety of breakdowns in your financial processes that carry wide-reaching consequences for your organization’s cash flow. Let’s take a closer look at how your health system is susceptible to errors in tax compliance.

What tax liabilities do health systems have?

A non-profit health system’s sales and use tax liability vary greatly depending on the state. Some states may exempt only tax on labor, others on only materials, some only certain products and some a combination of all. It all depends. Where products may be charged sales tax at the time of purchase, if not, then hospitals are responsible for paying use tax after the purchase for consumption. So, if a supplier fails to collect sales tax, the liability is on the purchaser to pay use tax, which is the same rate as sales tax.

For example, let’s say your health system in Oklahoma is purchasing surgical supplies from a company in Missouri. The Missouri Company may not be required to collect sales tax on that purchase, however, the responsibility is on your health system to identify the need to and pay use tax on those supplies – if they are taxable.

What are the most common tax errors for health systems?

For many systems, fully understanding current tax laws and applying them across a network of hospitals spanning multiple states is a challenge. The clerks ultimately paying bills for the hospitals aren’t always up to date on tax regulations, leaving a wide margin for human error.

Taxes buried deep within invoices or services paid via a check request can simply be overlooked by both the approver and payer.

We also encounter errors in a hospital’s master list. A system may flag an item as taxable in the item master when it’s actually non-taxable, and vice versa. So, when an item is keyed incorrectly in the master, it’s incorrect on every invoice. This can go on for years before anyone catches the error.

What are the consequences of making tax errors?

In time, tax errors can cause a total of thousands of dollars for taxes paid in error, or in penalties for not paying correctly. It depends on how your organization should be taxed and your process for managing and paying the correct taxes. Regardless, those lost funds present numerous challenges for your organization’s cash flow.

What is TAG’s approach to mitigating health system tax errors?

Our group works closely with clients to analyze their process, identify breakdowns in their current processes and potentially recover significant lost funds to their organization. Throughout our process, we:

• Familiarize ourselves with current tax laws and our clients’ obligations to taxes
• Analyze the data to see what tax data is being recorded
• Identify errors or opportunities to streamline processes
• Educate our clients on what caused the errors and ways to prevent them

It’s no surprise that taxes are a complex matter for health systems, but our experience shows too many systems are not maximizing their tax benefits, costing them thousands of dollars in the process. That’s why our clients trust us to maximize their return and prevent errors that could result in a tax audit. We’d love to do the same for you. Contact our healthcare auditing professionals today.