Many HOAs face past due tax returns for a multitude of reasons. This can range in severity from a late filing or late payment to years of unfiled tax returns.
In fact, many HOAs have not filed in 3 years, 5 years or 7 years. We have even seen situations of 10 to 20 years.
The most common reason for HOA lack of compliance is simply not knowing they are required to file. Most HOAs don’t owe a lot in tax, they just don’t file the tax returns.
Before you can take care of past due tax liabilities, you must take care of filing past due tax returns. Filing the missing return or returns is the only way to get back on track with the IRS. Plain and simple, complete and file the past due tax returns.Fast Links
- Where do you start?
- Form 1120-H
- Failure to File Penalty
- Failure to Pay Penalty
- Interest Charges
- IRS Payment Plans
- HOA Never Filed Tax Returns
Where do you start?
Let’s take a look at the steps you should take to get the returns filed:
- Most importantly, realize that you have a problem that won’t go away on it’s own.
- Gather all financial statements (P&L and balance sheet).
- Review any and all IRS correspondence. There may have been many letters sent over the years inquiring about tax return status.
- Locate the last tax return that was filed. If you can’t find one then at least make sure that you have the HOA EIN (tax id#).
- Hire a CPA or other tax professional who has experience dealing with HOAs.
- Review all financial records and IRS letters and establish a game plan.
- Get the tax returns filed and wait for IRS assessments (if any).
- Deal with penalties and interest (more about this later).
Your HOA has the ability to file form 1120 or form 1120-H. But from a compliance standpoint, filing form 1120-H can be challenging. May sure you understand the tips and tricks to filing form 1120-H.
When you do not file your HOA income tax return by the due date, a late filing penalty will be assessed. The penalty is based on the amount of the tax liability.
If you are due a refund and you do not file on time, there are no late filing penalties. However, the statute of limitations is 3 years (4 years for most states). If you are due a refund beyond the statute, then you will not receive it. Here is a breakdown of the penalties and interest:
Failure to File Penalty
The failure to file penalty is assessed based on the length of time from when your tax return was due to when it was actually filed. The penalty for this is 5% for every month that the return is late.
The maximum penalty for failure to file is 25%. Once you pass 5 months without filing, you have reached the maximum penalty for late filing.
Failure to Pay Penalty
The failure to pay penalty will be calculated based on the amount of tax that you actually owe. The amount for this penalty will be equal to .05% for every month that the tax liability remains unpaid and will continue to accumulate and be added to your balance until it is paid in full.
The IRS will charge interest on any unpaid tax liability. Interest rates can change every 3 months based on what the Federal government sets the interest rate at.
Currently, the interest for underpayment of taxes is 4% of the amount due per year. The interest is calculated for each date that the balance is not paid.
Obviously, penalties and interest can add a substantial amount to a tax liability that may already be difficult or impossible to pay at this time. However, if you simply file the return, you will at least eliminate those penalties continuing to accumulate.
If you know in advance that you will not make the deadline, it is actually quite advantageous to file an extension and avoid the failure to file penalty altogether.
IRS Payment Plans
Even when your HOA owes the IRS a substantial amount of money, it is not hopeless. There are several options that you may have to settle your past due tax problems.
Once your tax liability is properly assessed, you may be able to work with the IRS to make monthly payments in an Installment Agreement. There are other options that you may have to help you reduce your tax debt. Unfortunately, until the past due returns are filed, you will not be able to use any of the options available.
HOA Never Filed Tax Returns
If you are still concerned about where to start, you may want to immediately contact a CPA or tax professional who has experience dealing with back filed HOA returns.
A tax professional will be able to instruct you on your rights, provide you with all the tools that you need to complete the returns, and negotiate with the IRS on your behalf. There may even be a chance that the HOA qualifies for an offer in compromise.
How to get back tax returns filed:
- Gather financial information (P&L and balance sheet)
Make sure that your financial statements are reconciled and accurate. Make sure that the Board has approved the statements and that they properly reflect the financial activity of the association.
- Examine all IRS correspondence
You might find letters dating back many years. These letters might not be for just non-filing but could relate the payment due and penalties and interest.
- Determine state tax obligations
Each state has different rules and regulations when it comes to HOAs and condo associations. Many states don’t have any filing requirements, but some states like California and New York have complex rules.
- Locate a CPA or tax professional
You may chose to go it alone. Make sure you discuss with the Board. But if you want a tax professional to help then make sure you hire one with adequate experience.
- Get a game plan for penalties and interest
Most HOAs don’t have any interest or penalties due. This is mostly because they don’t have a balance due on the return.
When it comes to knowing what your options are and best protecting your interests in finding the right option to settle your tax debt, CPAs can greatly assist. So if your HOA never filed tax returns, you choose to go it alone. Just make sure you are educated and get them filed.
Dennis Green says
Will you still be penalized for not filing if your HOA has no tax liability. All dues collected pay the bills, there is no income to be taxed. Do you even need to file a return if you have no income.
Hi Dennis –
An HOA must file a tax return every year regardless of net income or loss. An HOA that doesn’t file by the deadline faces penalties of 5% of any unpaid tax for every month the return is delinquent (up to a maximum of 25%). The minimum penalty for any return over 60 days late is the lesser of the tax due or $210.
At the end of the day, if you don’t owe any tax you likely will not have any penalties. But you could lose your right to file form 1120-H. Make sure you get any back tax returns filed ASAP.