In recent years, the IRS has started to clamp down on HOAs due to a significant amount of unfiled HOA tax returns. For the most part, this actually comes from not knowing a tax return is necessary rather than people just ignoring it.
With the good news first, most HOAs don’t necessarily owe money but instead just the tax returns. On the other hand, it’s common for HOAs not to have filed for six, seven, eight years and beyond. If this is the case for you, we have some help for you here today!
So how do you start?
Before anything else, we urge you to recognize the problem and deal with it now before it gets even worse. From here, start by gathering all the financial statements you can as well as any letters and documents you have in relation to the IRS. If possible, find the last tax return for the HOA or at least get your tax identification number (HOA EIN) ready.
If you’re to tackle this problem properly, we highly suggest getting in contact with an accountant. With a qualified finance professional by your side, you’ll have someone who spends their lives around financial accounts and HOA tax returns. Although we don’t always live in a perfect world, the ideal solution from here would be a simple filing of the returns before waiting for the IRS assessments. Of course, you might have to face penalties so let’s look into what could happen moving forward.
Failure to File or Pay Penalties – If we deal with the actual filing first, you’ll receive a 5% penalty for every month the return isn’t filed after the filing date. However, the maximum penalty is 25% after five months and will never go any higher than this. If you fail to pay what’s owed, this will be judged on a case-by-case basis depending on the amount itself. As a percentage, 0.05% will be added to the balance each month and there’s no limit to how high this will go.
Interest – Depending on the interest rates set by the federal government, the IRS will add this on top if you have an unpaid liability. As we know, this changes four times a year but it’s currently 4% (this will be added to your balance every twelve months).
Filing – With this in mind, it’s certainly in your best interest to file the HOA tax return as soon as possible. If you have an outstanding amount owing, this will continue to increase over time so it’s always best to stay up-to-date with all tax liabilities. If you’re worried about missing the cut-off date, you can actually request an extension which is much better than receiving a penalty.
When it comes to the actual filing process itself, your accountant will tell you there are two main options; Form 1120-H or Form 1120. In truth, they both have benefits and drawbacks and an accountant will assess which is the best option for the HOA. Interestingly, you can flip between the two from one year to the next. Therefore, you might use different forms during this catching up process if you’ve got several years of unfiled hoa tax returns.
If you believe you might be owed a refund, there are no penalties for filing late but you will lose your right to the refund if you don’t file within a certain amount of time and this is called the ‘statute of limitations’. For the HOA tax return, it falls at either three of four years (depending on your state).
Still need help with unfiled HOA tax returns?
Considering there are methods of settling tax liabilities, there’s no reason to avoid HOA taxes; the situation will never improve if you ignore it. To get started, contact a reliable accountant and let them know your situation!