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Guidance -- Tax -- 1120 Form Checklist

This checklist helps a homeowners association assess the risk of filing its federal income tax return using Form 1120, in lieu of Form 1120H.  The checklist is divided between responsibilities of the association and tax preparer. There are no guarantees that conformance with each step below will guarantee an audit proof tax return.  However, the points listed are those that have been used by the IRS consistently in determining if the association has filed its tax return properly. The more “No” answers, the lower the chance of surviving a tax audit.

The Association’s Responsibilities:

Are separate bank accounts maintained for the operating fund and reserve fund?

Has a reserve study been performed?

Does the reserve budget agree with the reserve study?

Are operating and reserve transactions separately accounted for in the financial statements and general ledger?

Does the membership annually approve the association's election under Revenue Ruling 70-604? (This is significantly more preferable to the board of directors approving the election on behalf of the membership).

Are there no inter-fund borrowing between the operating fund and the capital reserve fund? If there are inter-fund borrowings, are sufficient records maintained of these borrowings?

Are the reserve assessments that are initially collected and deposited into an operating account transferred to the reserve fund as soon as possible?

Are reserve expenditures made directly from the reserve fund? If reserve expenditures are paid from the operating account, is the operating account reimbursed in the exact amount of the expenditure from the reserve fund as soon as possible?

Tax Preparer’s  Responsibilities:

Is a clear delineation of member versus non-member activities shown on supporting schedules to the tax return?

Is a clear delineation of operating versus capital transactions shown on supporting schedules to the tax return?

Has a complete reconciliation of book to taxable income been shown on schedule M-1 of the tax return?