Fishy HOA payments

I recently learned that our HOA treasurer has been paying HOA gardening fees from his personal account and then not paying his monthly HOA dues for several years. He says he doesn't owe any HOA dues as a result. Seems really fishy especially as he hasn't produced canceled checks to prove his story. Is there any point of law I can use to get a judgement against him?

Rick

As Mel said, anything in lieu of dues is something that should never be done.

Easy to say well I owe you $10 and he owes me $10, so he pays you $10. This is not a proper bookkeeping method thus open to questions from all, such as you.

This needs to be looked at closer. While it may not be fishy, it is far from the proper method.

Hope this helps.

As others have said the process should be that he pays his dues and the Association issues a check back to him to reimburse for expenses. Additionally, there should be a receipt for each check issued.

Failure to follow the proper process can cause questions and actually have a future board believe the Treasurer owes for Assessments when he doesn't (or does). It causes perception issues and is just not good accounting practice.

I suggest approaching the Board and request, for the protection of the Board and the Treasurer, that the previous practice be ended and the proper process be started. It may still leave questions unanswered but it's a step in the right direction.

Perhaps you can volunteer to assist the Treasurer in the keeping of the ledgers.

It's not good business practice to mix personal and business (HOA) funds in this manner. In fact, the IRS frowns on it. What if the value of the association fees (dues) exceeds the amount the treasurer is paying for the gardening fees? Not only is the HOA coming out on the short end, but that difference is considered by the IRS to be income to the treasurer (which is most likely not being reported). Furthermore, how does the HOA properly account for its expenses when preparing its Form 1120-H each year?

I once did a tax return for a gentleman who combined his personal and business funds in a single dba account. The IRS considered all funds deposited into that account, including his social security and VA disability payments, as business income. It was a mess.

Is the gardening company, assuming you have one, indicating they are not being paid?
Do you have a Management Co. They should have stopped this in its tracks or at least the Board showed have seen a delinquent amount for dues on the monthly statements? Where have they been all this time. Not only should the treasurer review monthly statements but the President and VP should also.

Now on to dues. I would review the Davis-Sterling website regarding this issue. I did find the following:
http://www.davis-stirling.com/MainIndex/DutytoPay/tabid/1400/Default.aspx#axzz215mRB5bF
which I'm reading is it is the responsibility of the Homeowner to pay their dues.

Regardless a stop needs to be done to this immediately and the Gardener paid directly from the HOA not a Homeowner or Board Member.

Rick,

Since the person doing this (paying HOA gardening fees from his personal account and then not paying his monthly HOA dues) is your treasurer I would be concerned about what else he has done with the association's funds. I am not suggesting any deliberate misuse of funds, but what he has done is far enough outside the envelope of good financial management practices to warrant further investigation into all finances he has handled. Since this went on for several years, does this mean that there were no audits of your records?

Technically, if dues are mandatory, this person isn't paying dues they technically owe monthly dues for all the months they did not pay. The officers are not authorized to trade mandatory dues for services. Courts have sided with HOA's similar to this same issue and homeowners have owed all back dues. Not a good idea to do.

If HOA's want to do such thing, you need to pay your dues, have cancelled check or receipt, then get paid to do gardening.

Actually, our HOA has been self-managing and I have been out of state as an absentee landlord and just trusting the officers to do their duties.

What are the value of the dues? The HOA could send him a 1099-MISC at the end of the year for the value of the dues (remember to file copy A with the IRS). That will force him to claim that amount on his tax return or he will get a nasty notice from the IRS. To make things right he will be forced to file schedule C and claim his payment to the gardener as a deduction on the schedule C. Any excess will be income to him and he will have to pay self employment tax (double the standard SS tax) plus income tax on any excess. Faced with that possibility he might be more cooperative. (Don't tell him about claiming the gardener payment as a deduction on schedule C. Let him figure that out for himself.)

Rick,

Melissa is correct, but based on what you've posted, that is not likely to convince him to pay his dues.

Here's how the threat of use of the 1099-MISC works:

He is paying for gardening services in lieu of paying dues. That's what is known as a barter exchange. As far as the IRS is concerned, if the barter exchange is not equal, one of the parties to the exchange is receiving income, and it must be reported.

He is paying for the gardening fees. That is not the HOA's expense, it is HIS expense. The expense to the HOA is the value of the dues. Therefore, to account for this expense, the HOA (properly) should file a 1099-MISC for the value of the dues paid to this person. This person is not an employee, so the value of this "service" is properly reported on a 1099-MISC.

Now, this person MUST report this income to the IRS. The only way to offset this income is to report the amount of the gardening fees as an expense. If he tries to do this on schedule A as an employee business expense he can only deduct the amount that exceeds 2% of his AGI. To deduct the full amount he must file a schedule C, but then he will be forced to pay self-employment tax in addition to any income tax on any excess.

In any event, this results in more work for him and he may have to consult a tax adviser which will cost him still more money. He will ultimately be better off by paying his dues and letting the HOA pay for the gardening fees as it should be.

Thanks again guys. I think I'll try this threat of the 1099-MISC.