Community Association Resources

Fraud Information for Community and Homeowners Associations

Each of the links below lead to PDF documents.

  1. Glossary of Key Fraud Terms
  2. Fraud Diagram
  3. Employee Fraud Opportunities Checklist
  4. Fraud Attention Grabbers Checklist
  5. Fraud Risk Factors Checklist
  6. Fraud Circumstances Checklist
  7. ACFE 2014 Report to the Nations
  8. Managing the Business risk of Fraud a Practical Guide
  9. The Fraud Triangle
Financial Reporting Services Defined

1. Compilation: Lowest reporting service

Compilation: Presents in the form of financial statements information that is the representation of management.

Defined:
“The term compilation of financial statement(s) basically means that an “outside accountant” who is in the “practice of public accounting” has prepared the financial statements of an entity without undertaking to express any form of assurance on the financial statements.”

Assurance to Users of Financial Statements:
In a compilation report, the accountant does not give any form of assurance on the financial statements. However, the accountant does assure the users of the report that the compilation was performed in accordance with the Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

Requirements of a CPA in a Compilation Engagement
1. Compliance with the AICPA “Ethics Standards”
2. Compliance with the AICPA “Quality Control Standards”
3. Compliance with the “Compilation Service Standards”

2. Review: Mid Level reporting service

Defined:
Review: A review of historical financial statements is a professional service that involves the expression of limited assurance that a financial statement(s) is free from material misstatements.

Assurance to Users of Financial Statements:
Limited assurance that the financial statements are free from material misstatements.

Requirements of a CPA in a Review Engagement
1. Compliance with the AICPA “Ethics Standards”
2. Compliance with the AICPA “Quality Control Standards”
3. Compliance with the “Review Service Standards”

A Review Includes:
• Analytical procedures to financial data
• Inquiries of management and others
• Obtain a management representation letter

3. Audit: Highest level of reporting service

Defined:
Audit: An audit is a formalized process designed to obtain reasonable assurance that a financial statement(s) is free of material misstatements whether caused by errors, frauds, and/or direct illegal acts with respect to the management assertions embodied in the financial statement(s)

Assurance to Users of Financial Statements:
The CPA issues an Opinion as to whether or not the Financial Statement(s) present fairly in all material respects the financial position and results of operations of an entity.

Requirements of a CPA in an Audit Engagement
1. Compliance with the AICPA “Ethics Standards”
2. Compliance with the AICPA “Quality Control Standards”
3. Compliance with the “Auditing Standards”

An audit involves: 
Internal control assessment, inquiries, analytical procedures, third party confirmations, vouching, tracing, in-depth procedures on various accounts, etc.

Overview of Tax Law for Community Associations

All community associations generally are taxed as corporations, but the available tax options depend, in part, on the specific type of association—condominium association, homeowners’ association, cooperative housing corporation, or timeshare association.

Residential condominium associations, homeowners’ associations, and timeshare associations may be taxed either under IRC Section 277, which applies to certain membership organizations, or may elect to be taxed under IRC Section 528, which applies specifically to homeowners’ associations as that term is defined for tax purposes. Qualified associations that elect to be taxed under IRC Section 528 file Form 1120-H, U.S. Income Tax Return for Homeowners Associations. Associations that are taxed under IRC Section 277 file the standard Form 1120. Commercial condominium associations file Form 1120. Cooperatives are subject to subchapter T and file Form 1120-C.

A small number of homeowners’ associations qualify as tax-exempt organizations and file Form 990, Return of Organization Exempt From Income Tax.

All associations must file a return (either a Form 1120, 1120-C, 1120-H, or 990), whether or not they have taxable income.

Which Form do you File?

Many associations choose which tax form to file by selecting the form that yields the lowest tax. However, the decision whether to file Form 1120 or Form 1120-H is a complex one that requires a full understanding of the tax treatment of the components of an association’s income and expenses.

Form 1120-H

If a condominium or homeowners’ association elects to be taxed under IRC Section 528, it must allocate its income and expenses between its exempt function activities and its activities for the production of gross income (or nonexempt function activities such as investment income, community room rental fees laundry facilities, etc). It is not taxed on its exempt function activities but is taxed at the rate of 30% on its net nonexempt function income (referred to as its homeowners’ association taxable income.)

If a qualifying timeshare association elects to be taxed under IRC Section 528, it is taxed at the rate of 32% on its net nonexempt function income.

Form 1120

Under IRC Section 277, an association must allocate its income and expenses between membership and nonmembership activities, and, by making certain tax elections, only its net nonmembership income is taxed at regular corporate tax rates. While exempt function and membership activities are similar in some respects, there are important differences.

Summary

The taxation of condominium associations, homeowners’ associations, and timeshare associations presents an option that is not available in any other area of taxation: the ability to choose which tax form to file and, therefore, which tax rate applies. The decision, however, is not as clear-cut as it may appear at first glance. Form 1120-H is a relatively simple form to prepare but has certain qualification requirements and a higher tax rate for most associations than the alternative Form 1120. On the other hand, Form 1120 is extremely complex. While it will normally result in a lower tax rate than Form 1120-H (for example, 15% for the first $50,000 of taxable income), its complexity and the lack of specific rulings in several areas create a much higher tax exposure risk when using that form. The ultimate decision is the association’s, not the accountant’s. Few associations, however, will be knowledgeable enough to make the decision alone. Rather, they will rely on the professional advice of their tax preparer.

Helpful Articles

Each of the links below lead to PDF documents.

Revenue Ruling 70-604 and Your Association

Compilations, and Reviews, and Audits! Oh My!

Association Finances – Safeguarding from Errors, Fraud and Chasing Bad Debt

Safeguarding the Finances of your Association

Community Association Industry Links

Arizona Association of Community Managers

CAI – Central Arizona Chapter

Community Associations Institute

HOA Pulse