MaryA1 (Arizona)
Posts: 7,043
Posts: 7,043
Posted:
FYI. . .
Audit Update IRS Delays Collection of Settlements From San Diego Associations
Vol. 3, no. 1
Ledger Quarterly, Summer 1991
Gayle L. Cagianut, CPA
In March of 1993, the IRS surprised several San Diego homeowner associations with audits claiming they owed thousands of dollars in back taxes. The audits were directed to associations that filed Form 1120 (corporation tax return). Initial audit findings disclosed that the IRS believed these associations were not following proper procedures because: 1. Reserve cash activity was not segregated from operating cash. 2. Noncapital reserve items (specifically painting and contingency) were incorrectly included as reserve items for tax purposes. 3. IRS Revenue Ruling 70-604, which allows an association to transfer excess operating income to the following year's budget, was not being correctly elected by the members. 4. Reserve assessments needed to be special assessments, not part of the regular monthly assessment. The IRS San Diego audit manager recently announced that because of the national publicity generated from the audits, the IRS will not collect settlements from them. Instead, the IRS will conduct a formal study of the matter and issue a position statement or revenue ruling. Many accounting professionals believe that associations will prevail in most of the cases. They also assert that associations may continue to file Form 1120 and reap the benefit of a 15 percent tax rate (in some cases), as opposed to the 30 percent Form 1120-H tax rate. However, to avoid an audit associations should: [] Segregate reserve cash and operating cash and its activity. [] Segregate noncapital type reserve items into a separate cash account. [] Have the members elect 70-604 if this revenue ruling is being used. [] Make sure that the reserve portion of the assessment is distinct on the budget and is considered to be a "contribution of capital" on the tax return.
Gayle L. Cagianut is a CPA with Cagianut & Grunewald, CPAs of Oak View, California.
Audit Update IRS Delays Collection of Settlements From San Diego Associations
Vol. 3, no. 1
Ledger Quarterly, Summer 1991
Gayle L. Cagianut, CPA
In March of 1993, the IRS surprised several San Diego homeowner associations with audits claiming they owed thousands of dollars in back taxes. The audits were directed to associations that filed Form 1120 (corporation tax return). Initial audit findings disclosed that the IRS believed these associations were not following proper procedures because: 1. Reserve cash activity was not segregated from operating cash. 2. Noncapital reserve items (specifically painting and contingency) were incorrectly included as reserve items for tax purposes. 3. IRS Revenue Ruling 70-604, which allows an association to transfer excess operating income to the following year's budget, was not being correctly elected by the members. 4. Reserve assessments needed to be special assessments, not part of the regular monthly assessment. The IRS San Diego audit manager recently announced that because of the national publicity generated from the audits, the IRS will not collect settlements from them. Instead, the IRS will conduct a formal study of the matter and issue a position statement or revenue ruling. Many accounting professionals believe that associations will prevail in most of the cases. They also assert that associations may continue to file Form 1120 and reap the benefit of a 15 percent tax rate (in some cases), as opposed to the 30 percent Form 1120-H tax rate. However, to avoid an audit associations should: [] Segregate reserve cash and operating cash and its activity. [] Segregate noncapital type reserve items into a separate cash account. [] Have the members elect 70-604 if this revenue ruling is being used. [] Make sure that the reserve portion of the assessment is distinct on the budget and is considered to be a "contribution of capital" on the tax return.
Gayle L. Cagianut is a CPA with Cagianut & Grunewald, CPAs of Oak View, California.