The board members for the Oak Forest Homeowners Association (OFHA) changed over the years. So did its mailing address and the size of its operating budget.
OFHA president Elizabeth Villarreal said those factors contributed to the HOA’s failure to file required tax forms with the Internal Revenue Service, leading to the revocation of the nonprofit organization’s tax-exempt status. The OFHA is attempting to restore its tax exemption while taking steps to ensure a Form 990, an annual financial report for nonprofits, is filed on time in future years.
The OFHA, which enforces deed restrictions and operates for the betterment of the historic Northwest Houston neighborhood, did not file 990s from 2014-18. After the filing deadline in 2017, its tax-exempt status was automatically revoked by the IRS.
Villarreal said board members did not realize the tax-exempt status had been revoked until February of this year, when then-treasurer Jeff Holmes made the discovery about one month into his tenure. Villarreal said not filing the forms appears to have been an innocent oversight on the part of previous board members, all of whom are volunteers.
“I guess they didn’t know what to do,” she said.
What impact has losing its tax-exempt status had on the OFHA and the neighborhood it serves, which includes more than 5,000 homes? How will Oak Forest be affected moving forward?
The consequences have been minimal and likely will continue to be, according to Villarreal and two other board members, who cited conversations they’ve had with OFHA attorney John Barnes and the IRS. The board members said the homeowners association has functioned normally over the years and recently taken actions to resolve the tax issue and prevent it from recurring, including hiring a third-party bookkeeper, drafting a fiscal policy that details the financial responsibilities of the HOA and its officers, and filing the 990 forms for tax years 2014-18 within the last few months.
The OFHA plans to add the fiscal policy to its bylaws at next month’s general member meeting, after which it will submit a Form 1024A to the IRS. The form will request that the organization’s tax-exempt status be retroactively restored effective May 15, 2017, the date it was revoked.
“(Barnes) seems to think it’s nothing,” longtime board member Martha Mears said. “It will all be taken care of.”
The OFHA also will submit a reasonable cause statement to the IRS detailing why the 990 forms were not filed on time as well as the measures it is taking to ensure the forms will be promptly submitted in the future. The reasonable cause statement presented to members Monday night said the OFHA did not file the 990 forms because of bookkeeping deficiencies, an address change that caused it to not receive notifications from the IRS and an operating budget that ballooned from less than $50,000 early in 2013 to about $300,000 later that year, when the OFHA enlisted SEAL Security Services to patrol the neighborhood. The greater the budget for a nonprofit, the more extensive its 990 forms must be.
Holmes, who said he resigned as OFHA treasurer in May in part because of the tax issue and how it was being handled by the other board members, is not convinced the IRS will reinstate the HOA’s tax-exempt status. He said its tax exemption was previously revoked for the same reason within the last 10 years, so he suspects the IRS will demand a greater level of assurance before reinstating the OFHA again.
If the OFHA’s tax-exempt status is not restored, it will have to pay federal income taxes for 2017 and 2018 and operate as a for-profit corporation moving forward. Holmes said that could have a domino effect detrimental to the HOA, which could be forced to raise its voluntary $40 membership dues or reduce its services to the neighborhood. Holmes said it could cause the OFHA to eventually go bankrupt.
“Obviously the worst that could happen is that there’s not an organization to enforce deed restrictions,” Holmes said. “Then (that authority) falls back to the city.”
Mears, Villarreal and Eric Fontenot, the OFHA’s sergeant at arms who said he spoke to the IRS on Monday, said the board members are confident the tax-exempt status will be reinstated. And if that happens, the only consequences of having it revoked will have been HOA money spent on the attorney and bookkeeper as well as the time and energy spent by the board members who have worked to rectify the situation.
Holmes, Mears and Villarreal said all the organization’s money is accounted for dating back to 2014, meaning they have not discovered any malfeasance on the part of previous board members. And since the OFHA is a 501(c)4 and not a charitable 501(c)3, donations made to the HOA have never been tax deductible, meaning the lack of a tax exemption has no impact on the personal taxes of people who contribute to the organization.
None of the 20 or so people who attended Monday’s meeting, including the board members, said they were worried about the OFHA losing its tax-exempt status. And when prompted to ask questions about the matter, none of them did.
“It’s kind of water under the bridge,” said Oak Forest resident Frank Munsey, the husband of OFHA vice president Jessi Munsey. “My concern’s there, but it’s not something I get too fired up about, because it’s been, what, six years that we haven’t done this?
“What I am positive about is we have an organization that’s righting the ship and actually heading us in the right direction. That’s what important to me is we’re recognizing this and we’re doing the right thing for our community.”
Mears and Villarreal said they are anxious to put the issue behind them and the HOA as a whole. Villarreal said it’s been the board’s top priority since February.
She also said she and her fellow OFHA leaders are looking forward to leaving the next group of board members with a clean slate and protocols that will ensure they’ll be fiscally responsible and compliant with the IRS.
“It’s something we’ve been working on for so long,” Mears said. “I would love to go to a board meeting and not have to discuss it any longer and make sure we dotted all our ‘Is’ and crossed our ‘Ts’ and can move on.”