Tax question

Started by RichardS20 • 10 replies • 1414 views

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RichardS20 (Louisiana)
Posts: 7

Posted:

I am a board member in a small, 20 unit association that is about 30 years old. I have lived there for 3 years and only recently got on the board because I was concerned by the way things were being handled. We have a realty management company that handles the collection of dues, payment of bills, and until recently contractor bids.

I just discovered that the association (which is registered with the state as a non-profit corporation) has never filed a tax return. None of the current board members were aware of this or even knew that it was required (but then they don't even bother to read our financial statements so what else would you expect?). I know that it is required and the ins and outs of the tax laws involved. It is my belief that we should go to IRS as we have evidence through email correspondence that the realty management company knew all along and that the current board had no idea. The other board members feel like since we have not been caught by now, we should just ignore it. Potentially, there could be a lot of fees and penalties. I don't believe they have the the right to make that decision for the other owners. I don't even know if the IRS goes after condo associations or how they would find out.

Thank you for any assistance.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Richard,

You should explain to the individuals who indicated that "since we have not been caught by now, we should just ignore it" that knowingly violating a State or Federal law will not be covered by the Associations D&O insurance. Therefore, individual members of the Board can be held personally accountable for any penalties, fines etc. that they incur by refusing to follow the law. They will be required to fight any legal action brought about by this action out of their own pocket.

You have already indicated that you know what is the right thing to do. Download the forms, include a letter saying that as a newly elected member to the board you discovered that past Boards failed to properly file tax forms and include them. Yes there may be financial penalties involved for failure to file. Yes, there may be financial penalties involved and interest due for any taxes owed in those years.

Bottom line is that this will need to be done. It's better to do earlier than later.

Tim

RichardS20 (Louisiana)
Posts: 7

Posted:

thank you for your answer. I am having issues with the way they do things. We are having our roof work done and the realty company got two bids, I went out and got 4 bids, and one of the other board members got one bid. The lowest bid was a roofer that I know who has done work for me before so I know he is good. I didn't share bids, but I asked him to give us the lowest price he could due to our financial issues and let him know that I had other work for him at my family's business.

They decided to go with the roofer the other board member got who was over $5,000 more expensive AND who is getting his house built by the board member's brother.

JanetB2 (Colorado)
Posts: 4,219

Posted:

You know one roofer and offered other work at family business AND the other member knows a roofer getting his house built by the members brother. Not alot of differences here ...

I tend to dislike these type situations as it causes conflict and could appear to others that there is potential conflict of interest. When anyone knows someone putting in bids I always suggest utilizing neutral party such as:

Have your Architectural Control Members open the bids, put the bid information into a spreadsheet with NO COMPANY NAMES listed. They instead will give each bidder a number and that number will also be written on their bid package. This list of what will be done, materials used, pricing, etc. from each bid is given to the board to vote and decide on who gets the job. This would eliminate any potential conflict of interest because the board will only know each bid by their number assigned.

IMPORTANT: Be sure to only list those who have a good reputation and have been verified for completing quality work.

SusanW1 (Michigan)
Posts: 5,202

Posted:

Why do you think there will be "penalties and fees" from the IRS?

With such a small number of units, unless you are getting huge revenue from interest in savings/reserve accounts, mostly likely there will be no action.

What is your revenue each year?

RichardS20 (Louisiana)
Posts: 7

Posted:

Quote:

Posted By JanetB2 on 01/18/2011 8:59 AM
You know one roofer and offered other work at family business AND the other member knows a roofer getting his house built by the members brother. Not alot of differences here ...

I tend to dislike these type situations as it causes conflict and could appear to others that there is potential conflict of interest. When anyone knows someone putting in bids I always suggest utilizing neutral party such as:

Have your Architectural Control Members open the bids, put the bid information into a spreadsheet with NO COMPANY NAMES listed. They instead will give each bidder a number and that number will also be written on their bid package. This list of what will be done, materials used, pricing, etc. from each bid is given to the board to vote and decide on who gets the job. This would eliminate any potential conflict of interest because the board will only know each bid by their number assigned.

IMPORTANT: Be sure to only list those who have a good reputation and have been verified for completing quality work.

every company had the same scope of work listed. we are only 20 units...small time here. There are no Architectural Control Members. Also, there are a couple of difference between what he did and what I did

1)I got 4 bids total
2)the bid of the roofer I know happened to be the lowest. I didn't attempt to push through the bid of a roofer asking for more money to do the same work.

I have used my business contacts to help out. The roofer is one example while another is me using the attorney my family has on retainer to review two different contracts that we were looking to enter into. In one instance, that saved the association and owners over $8,000 because she caught something that nobody else noticed.

RichardS20 (Louisiana)
Posts: 7

Posted:

I spoke to an IRS agent about a 'hypothetical' situation and this is what they told me. We are a corporation that could be non-profit but is not due to the fact that we have never filed as one. Being eligible to be non-profit is not enough. One is not a non-profit unless they have filed a form 1120-H, 990, or 1120. So conceivably the IRS could, if they choose, count our monthly payments as income. Even besides that, there are potential fines for not filing when one is required to do so by law.

RogerB (Colorado)
Posts: 5,067

Posted:

Richard, your HOA can file IRS form 1120-H. Only income which is from "outside the HOA", such as interest on CDs, is taxable. Assessments, late charges, fines, etc are not income from "outside the HOA". There is a standard deduction of $100, thus you owe nothing if outside income is less than $100. You may also need to file state tax.

SusanW1 (Michigan)
Posts: 5,202

Posted:

What do the corporation papers say? Do they say you are a for-profit?
I doubt it.

RichardS20 (Louisiana)
Posts: 7

Posted:

when i looked on the Secretary of State website, it showed that we are a for profit. However apparently the realty company let everything lapse and it was finally renewed in 2010. Will that be retroactive? I know the IRS can go back several years

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Even if it says "for profit" it may not be what you think. The state may only list profit and non-profit. HOA is definitely not a non-profit. So it may be listed as "for profit" because if you did make a profit like renting out function halls, etc, you would need to pay taxes on that. Understand?

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