HOA IRS debt can result from unpaid taxes, late tax returns, penalties, interest, or reporting errors. The association itself generally owes the IRS when taxes are due. That said, the question of who caused the debt can be more complicated.
How Does an HOA IRS Debt Happen?
Homeowners associations and condominiums are no strangers to debt. These communities can incur debt to vendors, banks, and even the government. When it comes to taxes, HOA IRS debt is a common topic of discussion.
An HOA can owe the IRS for several reasons, including but not limited to:
- Failure to file required federal tax returns
- Filing tax returns late
- Underpaying federal income taxes
- Failing to pay taxes by the applicable deadline
- Incorrectly calculating taxable income
- Misclassifying income as exempt
- Failing to report certain income
- Failing to make required estimated tax payments
- Payroll tax problems if the HOA has employees
- Penalties and interest accumulating on an underlying tax liability
Is an HOA Required to Pay Income Taxes?
In general, HOAs and condo associations must pay federal income tax and file tax returns. While often organized as nonprofit corporations, these associations are not classified as tax-exempt entities under the IRS.
That said, some HOAs can fall under Internal Revenue Code Section 528. This provides special federal tax treatment for qualifying associations. To qualify, an association must meet specific requirements and make the appropriate election.
Who is Legally Responsible for HOA Debt to the IRS?
The HOA tax liability generally belongs to the association itself. An HOA is a separate legal entity, which means its tax obligations don’t transfer to homeowners as personal debts.
That said, it is often difficult to point the finger at a faceless corporation. The HOA may have a claim against a board member, a management company, or an accountant if they were responsible for the tax filings.
Who’s at Fault if the HOA Never Filed a Tax Return?
When an HOA IRS debt results from years of missing tax returns, the board should first determine who was responsible for preparing and filing those returns. The answer can depend on the association’s governing documents, board resolutions, management agreement, and contracts with accountants or other professionals.
HOA Board
In general, the HOA board is responsible for overseeing the association’s financial and legal obligations. This includes tax filing and payment.
Board members don’t necessarily have to prepare the tax return by themselves. In fact, many hire outside professionals for the job. Of course, even then, the board has a duty to reasonably monitor the work and ensure that the HOA is in the clear.
The issue is whether the board knew or should have known about the tax obligation. If they did and failed to take action, they may be at fault.
HOA Management Company
Some communities delegate most of their administrative, financial, and legal responsibilities to an HOA management company. Whether or not this company is obligated to file tax returns and pay taxes on behalf of the HOA depends on the management contract.
If the management contract specifically includes tax filings and payments in its scope of work, then the company may be liable for missed deadlines. Boards must review the contract to understand what is required of the company and what remedies are in order. The HOA may potentially have a claim of negligence or breach of contract.
Accountant
An accountant might shoulder the blame if the HOA hired them to prepare and file the tax return and they failed to do so. Of course, simply hiring an accountant doesn’t automatically transfer the responsibility to them. The service agreement must clearly state the accountant’s obligations.
It is also important to determine whether the accountant actually had the authority to file the return. An accountant may prepare the document, but the association might be responsible for approving, signing, submitting, or paying it.
Are Board Members Personally Liable for HOA Tax Penalties?
Generally, board members are not personally liable for the HOA’s tax debt or related penalties simply because they serve on the board. This means that an HOA tax delinquency doesn’t automatically become the personal debt of every director.
Of course, there is an important distinction. A board member who wasn’t involved or didn’t contribute to the tax problem shouldn’t get the same treatment as a board member who knowingly failed to file a return or pay taxes.
Personal liability can also depend on state law, the association’s corporate structure, and the specific conduct involved. When in doubt, it is best to consult a professional.
What Happens When an HOA Doesn’t Pay the IRS?
When an HOA owes debt to the IRS, the balance can continue to grow through penalties and interest. The IRS will usually send notices demanding payment and explaining the amount owed. If the association ignores these, the IRS may take more serious action.
Eventually, the IRS might pursue collection using federal tax liens or levies. A tax lien can affect the association’s property interests, while a levy can allow the IRS to seize the association’s property or funds to settle the debt.
Additionally, unpaid taxes can place pressure on the association’s budget. Instead of allocating certain funds to necessary expenses, such as maintenance or insurance, the HOA board would need to use them to satisfy the HOA’s IRS debt. Worse yet, the board may have to raise dues to meet all obligations simultaneously.
Can the HOA Make Homeowners Pay the IRS Debt?
When an HOA owes a debt to the IRS, it typically uses its operating budget to cover it. This means that homeowners indirectly pay the debt.
Of course, since the IRS debt isn’t a recurring expense, it will likely cause dues to increase for the time being — at least until the debt is paid off. It is important for the HOA board to explain the reason behind the increase to minimize pushback from homeowners. Moreover, associations must operate transparently.
How to Correct HOA IRS Debt
If an HOA discovers it owes the IRS, it must address the issue as soon as possible. The following steps can help the association determine what happened and resolve the debt:
- Determine exactly how much the association owes the IRS.
- Identify the missing or incorrect tax filings.
- Determine whether the HOA actually owes the underlying tax.
- Calculate penalties and interest.
- Identify who was responsible for filing and paying.
- Consult a qualified HOA tax professional or tax attorney.
- File any delinquent returns.
- Explore penalty abatement (if available).
- Arrange payment or another resolution with the IRS.
- Determine whether the association has a claim against a responsible vendor or professional.
Furthermore, the HOA should improve its internal controls to ensure it doesn’t miss a tax deadline again. Even something as simple as setting a calendar reminder can help with compliance.
When All’s Said and Done
An HOA IRS debt can feel overwhelming, especially when board members don’t know how to resolve it. Personal liability isn’t always on the table. The HOA board should, instead, focus on addressing the issue and establishing procedures to prevent it from happening again.
Westward360 is a trusted partner for HOAs and condo associations across the United States. To get started on expert association management, contact us today or request a proposal online!
