Not knowing we had to, our non-profit association is delinquent in filing IRS tax returns. We believe we need to reconstruct returns for several years back and then get some professional accountant or attorney assistance.

Several puzzles have come up:

1. What can we claim to be expenses and what will be construed to be capital investments in maintaining the roads? Are culvert replacements expenses or investments to be depreciated over a period of years?

The IRS Agricultural Handbook gives an example of a leak in the corner of a barn roof. It says if the farmer replaces the corner of the roof to stop the leak it's a repair expense. If the roof is replaced it's a capital investment. Is replacement of two culverts out of ten an expense? The same question arises about gravel - if a washed out piece of the road is repaired with gravel is it an expense or an investment?

2. The question arises because there may be a technical need to have expenses to balance some minor revenues greater than a specified deductible of $100 that may be classified to be taxable. If our culvert and gravel repair payments can't be called expenses, our tax exposure will be inflated. How do other Road Associations handle these road costs, please may I ask? (We will probably need to file IRS Form 1120 - maybe 1120-H in future years.)

3. We note that IRS says the culvert, bridge, fence and road surface values of forest and farm roads can be depreciated. Does any Association out there have experience depreciating these values of their roads when filing tax returns? If so, does anybody know how to establish the value of a few miles of old private gravel road that was never bought and sold but came to the association as part of the subdivision? There's a bunch of culverts of unknown varying age, gravel laid down at various times, places and amounts. Would the tax value by the municipality be used? Is there some other acceptable way to assign a value to a road? We will probably want to be able to use depreciation in reconstructing tax returns if we have to, in order to show we have not made any taxable amount - its all been out-of-pocket expense to our members.

4. Has anybody had experience they can share about handling this sort of delinquency that came about because our officers have all been uninformed ordinary people with no experience in tax matters of this kind? Any recommendations on how or where to find (affordable) attorney or accountant counsel?

Much gratitude for any help at all. I don't know how to show email or phone, but can work that out if needed.

Thanks.

Many thanks for sharing your experience and good counsel.

We have the fortune to have solid detailed spreadsheet records backed up by invoices and checks. And the poor fortune that we never knew about IRS "Homeowners Association" provisions. My query about how to classify payments into "expenses" and "capital investments" goes to the desire now that we know, to provide the accountant who will ultimately be chosen with numbers that are most meaningful in reconstructing whatever may be needed.

The big question now is whether to file for this year with a cover letter of explanation and be prepared to respond to whatever IRS and Maine Revenue decide we must, or to assume without any guidance from the agencies that our entire history must be reconstructed and provided before it is "requested". (It appears that if the history is requested we will be able to show we never had revenue that would be taxable and there are indications that if that will be so, we will be looking at a different penalty than if we owed taxes. That's why I asked if anybody had experience with depreciating the value of culverts, bridges and road surface - the depreciation would be valuable as a balance if taxable revenue of any kind comes up.)

I hope your experience was positive in the end. It sounds like it became more complex than some of the counsel we've had that suggests we should simply file for this year and let the agencies tell us - at their cost, not ours in the beginning - what we need to do. If it then becomes complicated, then so be it. But there are opinions that if we are straightforward in advance it might be simple. And then, how does one discern whether some counsel reflects the interest of the counselor?

Nevertheless, your advice to get a good professional is much appreciated. Thank you. Warmth be with us.

In answer to your second question; Yes.

To the first "The Guide to Forming Road Associations" states "not usually". Pretty open ended.

Dealing with the IRS it's always better to be safe than sorry. They recommend individuals file personal tax returns even when they owe no tax.

Any group taking in sums of money and how they spend it, save it, invest it their interested in.

I would approach it that they "do apply" and file both fed. and state and persue that path to clear up the ambiguity. Once you reach that point,establish clear guidelines for successors within the association. It could require professional outsoucing for help.

I'm not an accountant or an attorney. I find anything to do with taxes hard to understand.  Based on my experience in an association the last 12 years so does everyone else except for the vocal experts whom I'm very leary of.

Just my personal opinion. Good luck.