HOA financial reporting requirements come from four different places at once: your state’s community association statute, your association’s CC&Rs, the IRS, and the mortgage lenders financing homes in your community. State law usually sets a tiered system that scales the required report (a compilation, a review, or a full audit) to the association’s annual revenue. Governing documents can demand more. The IRS expects an annual return regardless of size. And lenders like Fannie Mae impose their own financial standards that a board ignores at the community’s peril.
State Thresholds for Compilations, Reviews, and Audits
Most states tie the level of professional financial reporting to how much money the association handles. A common structure has three or four tiers: below a revenue floor, the association only needs a basic cash receipts and expenditures report; mid-range associations must obtain a compilation or review; and associations above a higher cutoff must get an independent audit. The exact dollar amounts vary, but many states set their thresholds somewhere between roughly $150,000 and $500,000 in annual revenue.
Your Declaration of Covenants, Conditions, and Restrictions can raise the bar. Some CC&Rs require an annual audit no matter what the revenue is, particularly in larger planned communities where the developer anticipated significant operating budgets. When the CC&Rs are stricter than the statute, the CC&Rs control.
One wrinkle catches boards off guard. Several states let the membership vote to accept a lower level of reporting than the statute would otherwise require. If members vote before the fiscal year closes to downgrade from an audit to a review, the association can save thousands in accounting fees. The vote has to happen in time. Once the fiscal year ends without one, the statutory requirement locks in.
What Each Report Level Actually Tells You
The words compilation, review, and audit describe very different products, and the difference is what the CPA promises about the numbers.
Compilation
A compilation is the most basic engagement. The CPA takes the financial data your management company or treasurer provides and organizes it into a standard financial statement format. That’s the whole job. The accountant doesn’t test transactions, doesn’t verify bank balances, and doesn’t look for errors or fraud. No assurance is provided about the accuracy of the numbers. It’s professional formatting, useful for small associations that want clean statements for the annual meeting.
Review
A review provides limited assurance. The CPA runs analytical procedures, comparing the current year to prior years and to the budget, and asks management about unusual transactions or large variances. If something looks off, the CPA digs in, but a review does not involve the independent verification you get in an audit. The report typically concludes that “nothing came to our attention” suggesting the statements are materially misstated. That’s a real step up from a compilation, but it is not a clean audit opinion.
Audit
An audit is the strongest level. The CPA confirms bank balances directly with the bank, examines vendor contracts, tests a sample of transactions against supporting invoices, and inspects physical assets where relevant. The auditor then issues a formal opinion on whether the financial statements fairly represent the association’s financial position. This is the only tier where the accountant’s professional reputation stands behind the accuracy of the numbers. For associations holding significant reserves or facing member disputes over money, an audit is the strongest protection for the board and the community.
Federal Tax Filing: Form 1120-H
Every HOA is a taxable entity to the IRS. Most file Form 1120-H, a simplified return designed for homeowners associations. Filing is an annual election under Internal Revenue Code Section 528 and must be made separately each year by the return’s due date, including extensions.
To qualify to file Form 1120-H, the association must meet three tests:
- At least 60% of gross income must come from exempt function income (membership dues, fees, and assessments collected from owners as members).
- At least 90% of spending must go toward acquiring, building, managing, maintaining, or caring for association property.
- No individual can profit from the association’s net earnings, aside from legitimate management activity or rebates of excess assessments.
Assessments, dues, and regular fees are exempt function income and are not taxed. What gets taxed is nonexempt income: bank interest, late fees, rental income from common areas, and similar revenue that doesn’t come from members acting as owners. Nonexempt income, minus directly connected expenses and a $100 statutory deduction, is taxed at a flat 30%. Timeshare associations pay 32%.1Office of the Law Revision Counsel. 26 USC 528 – Certain Homeowners Associations
The filing deadline is the 15th day of the fourth month after the end of the tax year. For a calendar-year association, that means April 15. Associations with a fiscal year ending June 30 face an earlier deadline: the 15th day of the third month after year-end. Form 7004 grants an automatic extension of time to file, but not of time to pay.2Internal Revenue Service. Instructions for Form 1120-H
Associations that fail the 60/90 tests can file a standard Form 1120 instead, but they lose the favorable treatment of exempt function income and face regular corporate tax rates. Boards should recheck the tests each year, because a spike in nonexempt income or an unusual capital expenditure pattern can push an association out of eligibility.
Mortgage Lender Requirements
HOA finances also matter to anyone buying or refinancing a home in the community. When a buyer applies for a mortgage, the lender reviews the association’s finances as part of loan approval. Fannie Mae’s Selling Guide, which sets standards for most conventional mortgages, imposes requirements that can go beyond state law.
Under Fannie Mae’s full review process for condo projects, lenders must confirm that:
- At least 10% of the association’s annual budgeted assessment income is allocated to replacement reserves for capital expenditures and deferred maintenance.
- No more than 15% of units are 60 or more days past due on common expense assessments.
- The projected budget includes line items appropriate for the project and adequately funds insurance deductibles.
A reserve study can substitute for the 10% calculation if it was completed within three years, prepared by an independent professional, and shows funded reserves meeting or exceeding the study’s recommendations.3Fannie Mae. Full Review Process – Fannie Mae Selling Guide
The practical effect on the board is real. If reserve funding drops below the 10% threshold, or if delinquencies climb too high, buyers may be unable to get conventional financing in the community, and property values follow. Lenders are reviewing your books whether the board invites them or not.
What Happens If the Board Skips a Required Report
Board members are fiduciaries. They owe the association a duty of care, a duty of loyalty, and a duty to act within their authority, and that last duty includes following both state law and the governing documents. Failing to obtain a required financial report exposes the board on several fronts.
Individual homeowners can sue for breach of fiduciary duty. Many governing documents include indemnification provisions covering board members’ legal costs, but those protections usually exclude gross negligence and willful misconduct, and deliberately ignoring a statutory audit requirement can look like willful misconduct. Directors and officers insurance provides a backstop when the association carries it, but coverage varies, and not every association has a policy.
Some states impose direct penalties, including fines or limits on the board’s ability to levy special assessments. Even without formal penalties, a board that can’t produce proper financial statements has little to point to when a dispute over assessments or spending lands in front of a judge or an angry membership. The financial report is the board’s primary evidence that community funds were handled responsibly.
Members’ Right to See Financial Records
Nearly every state gives HOA members the right to inspect the association’s financial records, though procedures and timelines vary. A written request to the board or management company generally triggers an obligation to produce records within a set number of business days. Records members can typically access include annual budgets, financial statements, audit reports, bank statements, and vendor contracts.
Associations may charge a reasonable copying fee, but they cannot use fees to block access. A formal written request that cites your state’s HOA statute is usually enough to get records moving if a board has been slow to share. Continued refusal to produce records is itself a breach of fiduciary duty in most jurisdictions and can result in court-ordered disclosure along with the homeowner’s attorney fees being shifted to the association.