Taxes, Audits & Financial Compliance
An HOA is an ordinary taxable corporation for federal purposes unless it affirmatively qualifies for and elects the special Section 528 regime on Form 1120-H. That election is only one of five independent compliance layers, alongside state tax, state corporate filings (registered agent, annual report), federal information returns, and whether the association's own documents require an audit, a review, or a compilation of its financial statements. Getting one layer right says nothing about the others.
Five layers, five different rulebooks
Boards tend to treat "we're compliant" as one status. It isn't. Federal income tax, state tax, state corporate-law compliance, federal information-reporting duties, and the level of financial scrutiny an association undergoes are five separate, independently governed layers. A board that has filed a perfect Form 1120-H for a decade can still be delinquent on its state annual report or missing a valid registered agent.
Start with the federal layer, because it is the one Congress wrote a dedicated statute for.
"A homeowners association shall be subject to taxation under this subtitle only to the extent provided in this section."
Source: 26 U.S.C. Section 528, Legal Information Institute, Cornell Law School
Section 528 is a federal income tax choice, made fresh every year, and it has no bearing on whether your association owes state income tax, sales tax, or must maintain a registered agent, which is set by your state, not the IRS. One federal filing obligation that many boards were told applied to them, beneficial ownership reporting under the Corporate Transparency Act, was eliminated for all U.S.-formed entities by a FinCEN rule effective August 14, 2026. See Beneficial-ownership/compliance developments before assuming an older answer still holds.
Your association is taxable unless it elects otherwise
"HOAs don't pay taxes because they're nonprofit" is one of the most common beliefs in this field, and it's wrong. Incorporating as a nonprofit is a state-law status; it does not by itself create federal tax exemption. Most associations are ordinary taxable corporations, filing either Form 1120-H under the Section 528 election or Form 1120 like any other corporation. See Do HOAs pay taxes?
The 1120-H election isn't permanent, and it isn't automatic once an association qualifies. It's made annually, and a qualifying association can choose Form 1120 instead in any year the numbers favor it. Filing 1120-H excludes exempt function income (dues and assessments tied to membership itself, not to facility use) and taxes the remainder at a flat rate:
"The taxable income of a homeowners association that files its tax return on Form 1120-H is taxed at a flat rate of 30% for condominium management associations and residential real estate management associations."
Source: Instructions for Form 1120-H (2025), IRS
Interest earned on reserves, nonmember payments, and usage-based facility charges stay taxable no matter which form is filed. See Section 528 basics, Exempt-function income, and Interest income.
Audit, review, or compilation: not the same report
A second common belief: that an audit, a review, and a compilation are basically the same report with different names. They represent materially different amounts of work and materially different levels of assurance. A compilation carries no assurance; a review offers limited assurance built on inquiry and analytics; only an audit involves testing the underlying records and results in an opinion on whether the statements are fairly presented.
Which one your association needs is typically set by state statute or by your own bylaws and CC&Rs, not by the IRS or by accounting standards themselves. Check your governing documents and your state's statute before assuming a review is "enough" or an audit is overkill.
"The auditor's report must state that the audit was conducted in accordance with GAAS."
Source: Clarified auditing standards on the auditor's report, AU-C 700 to 706, AICPA
See Audits, Reviews, Compilations, and Reading an audit report for what to actually look for in each.
Read these three, in order.
Everything in this course
26 lessons across 5 modules. Each one is about three minutes and stands on its own.
Federal income tax basics
State and local obligations
Payroll, vendors, and information returns
Financial statement scrutiny
Calendars and compliance developments
Sources
- Instructions for Form 1120-H (2025), IRS
- 26 U.S.C. Section 528, Certain Homeowners Associations, Legal Information Institute, Cornell Law School
- Publication 1099 (2026), General Instructions for Certain Information Returns, IRS
- Beneficial Ownership Information Reporting Requirement Revision, final rule, FinCEN / U.S. Treasury, Federal Register
- Breaking News: U.S. Treasury and FinCEN Issues Final Rule Ending Corporate Transparency Act's Beneficial Ownership Reporting Requirements for Community Association Board Members, CAI Advocacy Blog
- Clarified auditing standards on the auditor's report, AU-C 700 to 706, AICPA
- Statements on Standards for Accounting and Review Services (SSARS), AICPA, summarized by Journal of Accountancy
- AT-C Section 215, Agreed-Upon Procedures Engagements, AICPA, summarized by Deloitte DART
- What is a registered agent for an LLC or corporation?, Wolters Kluwer
State income tax, sales and use tax, and the specific audit, review, or compilation threshold that applies to your association all vary by state and by your governing documents.