One of the facts of life about being a manager is that you get to observe the behavior of lots of people. Not spying, just noticing what goes on around you.   Conflict is inevitable in a community association. My interest is in observing how different people react to conflict.

Living in a condominium project means that people live closer together than they do in single-family detached housing. Diverse individuals living in relatively close proximity can create the perfect atmosphere for conflict unless everyone tries to work together. Everyone has expectations about almost everything in their lives. We have expectations about how our family, friends, and neighbors should behave. When they don’t act in the manner expected, people often react by falling into a state of anger. Expectations aren’t limited just to people we know, but also extend to most of those with whom we come into contact or depend upon. We have an expectation that our leaders should make decisions that we believe to be right.

Road rage is often the result of failure to meet expectations. We expect the drivers of other vehicles to obey the rules of the road. Their failure to meet those expectations causes some people react with anger. Many times, what we expect of others is a reflection of what we expect of ourselves.

For most people, anger is not an emotion that feels good. It’s a negative emotion that disrupts your daily flow and brings out the worst parts of your personality. Anger generally makes people more aggressive and limits how they think about and treat others. It is usually directed outward towards someone else and creates distance between people. You isolate the party to whom your anger is directed, but, more importantly, you isolate yourself. Anger becomes a prison that keeps people from making better choices that reflect understanding, compassion, and caring. Those are attributes that contribute to your own happiness and the happiness of those around you.

One way to avoid anger is to transform your habit of expectations. That doesn’t mean that you allow people to walk all over you. It means you change what you expect of others. You understand that people can’t read each other’s mind, and their reasons for doing what they do usually have nothing to do with you.

Your neighbor didn’t take your assigned parking spot to make you angry; she did so because she couldn’t carry her groceries the longer distance from her own parking spot. Your neighbor didn’t let his dog poop on the lawn in front of your unit to make you angry; he did so because he hasn’t read or understood your Association’s rules. Changing your expectations to better understand other people’s positions will do a lot to disarm your anger.

If your neighbor behaves in a manner that fails to meet your expectations and makes you angry, the only way you are going to resolve the problem is by choosing to make an honest effort to remedy the situation “together” with your neighbor, not by creating an even wider distance between yourself and them through anger. Effective communication can only occur when there is a process of two-way listening. Anger prevents people from honestly listening to anything but your anger. Transforming your expectations reduces your opportunities to get angry, and puts you in a position to make better choices about how you relate to the people around you - and in turn, how they relate to you. When people work together, anything is possible!

This article shared with permission by Association Tax Services

We recently received an inquiry from a board member of an association referencing an article in one of our newsletters from three years ago - the January 2011 issue.  

That article concerned IRS Notice 2011-6 (issued in December 2010) that exempted management companies from what were at the time paid tax preparer requirements related to Form 1099.  The poorly drafted regulations would have defined any person that prepared a Form 1099 for compensation as a paid tax preparer.  Those regulations were created as a result of an IRS study in 2010 that identified significant problems with tax returns prepared by individuals that were not professional tax preparers (meaning they were not attorneys, CPAs, or enrolled agents).  The root problem was not who was preparing the forms, however.  Rather, the problem was in defining Form 1099 as a tax return.  Fortunately, IRS Notice 2011-6 corrected that folly by redefining Form 1099 as not being considered a “tax return.”

What triggered the current question was that the board member became concerned when he was elected to the board of his Association and discovered that an employee of the management company was preparing the tax return for his Association.  Upon questioning the management company, he learned that this individual also prepared tax returns for most of the associations managed by that company.  This board member had also just learned in a general discussion with his own CPA that ALL paid tax preparers are required to be registered with the IRS.

The specific question to us was whether or not the management company, or the employee of the management company, was required to be registered as a tax preparer with the IRS.  The short answer is yes!  Because the management company receives compensation for the services it performs, if those services also include preparation of association income tax returns, then the preparer of those returns (the employee) is considered to be a paid tax preparer.
The authority for this is found in Internal Revenue Code (IRC) Section 7701.
7701 Definitions.

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—

(36) Tax return preparer.

(A) In general. The term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.

(B)  Exceptions. A person shall not be an “ tax return preparer” merely because such person—(i)  furnishes typing, reproducing, or other mechanical assistance, (ii)  prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he is regularly and continuously employed, (iii)  prepares as a fiduciary a return or claim for refund for any person, or (iv)  prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer or in response to any waiver of restriction after the commencement of an audit of such taxpayer or another taxpayer if a determination in such audit of such other taxpayer directly or indirectly affects the tax liability of such taxpayer.

Treasury Decision 9527, issued June 6, 2011, announced Final Regulations for IRC Section 7701 that became effective August 2, 2011.  Those Regulations established the requirement for all tax preparers to register with the IRS for a Preparer Tax Identification Number (PTIN).  For all paid preparers that are not subject to the continuing education requirements applicable to attorneys, CPAs, or enrolled agents, the Regulations also established education requirements for tax preparers.
Tax preparers must register annually with the IRS, and pay a fee to renew their PTIN.  All PTINs expire on December 31 each year.  Failure to re-register annually would prevent an individual from legally preparing tax returns.

So, after all that explanation, our answer to the inquiring board member is to find out if the management company employee is a registered tax preparer.  If not, insist that your Association’s income tax returns be prepared by an outside registered tax preparer, preferably one experienced in the preparation of association tax returns.  Many people are lulled into a sense of complacency by the belief that association income taxes are very simple.  That’s a mistaken impression given by the one-page Form 1120-H.  In fact, association income taxes can be very complex. An experienced tax preparer will understand the complexity of the tax law and be able to offer advice on the best way to file to minimize both taxes and tax risk.

We put this story together by interviewing two of the people that were involved in the process. Though it actually occurred more than 20 years ago, it could have happened yesterday, or it could happen tomorrow. It is really a heartbreaking story of sorts. There were half a dozen associations involved, and while it is a board’s responsibility to protect Association assets, only one took that responsibility seriously. As a result, only one avoided the fraud.

The situation existed because the owner of a management company needed money. Motive and opportunity are two of the cornerstones of fraud, and both were present in this particular case.

Motive - Why did the manager need money? Because her daughter had contracted cancer and without expensive medical treatment, would probably die. And of course the young lady was uninsured.

Opportunity - The manager performed all accounting services for her association clients. She collected and deposited funds, wrote checks, and prepared bank reconciliations and monthly financial statements. The manager did insist that the board sign all checks “for the safety of the Association.” Because of this one fact, the associations thought they were safe.

If the board members signed all checks, how was the manager able to divert Association funds for her own personal use? The answer is a simple scam. Each time a new board was elected, the manager would make sure that new signature cards were prepared for the bank, and that those signature cards included only the signatures of board members. The manager would later obtain a second signature card from the bank, stating that the first one had been lost, and would place only her own signature on that second signature card. Only this second signature card was actually presented to the bank. The manager would dutifully have a board member sign all regular operating and reserve checks every month. To keep the scam alive and to make sure that the bank was properly recognizing checks drawn on the Association accounts, the manager would add her own signature above the board member’s signature after she had received the signed checks back from the board members. She also controlled the mailing of all checks.

The bank didn't have a problem with this because every check contained the proper signature, the manager’s signature. What the manager didn't tell the board was that she was writing additional checks made out to her company that contained only her signature. These checks were disguised in the accounting records by assigning these checks to various different accounts and using the names of actual vendors to hide the fact that the checks were in fact made out to the management company. As an example, some of the checks might have been coded as landscape extras and contained the landscape company’s name. Others might have been charged to repair or reserve general ledger accounts and would bear the name of the appropriate contractor for those activities.

If the board members didn't question too closely, these bogus checks would appear to be appropriate expenditures. Further, none of the checks individually were large enough to cause alarm. The manager also insisted that no audit or review of the financial statements was necessary since the accounting was so transparent and those services were too costly. As a result, there was never anyone to double-check the work of the manager and review the appropriateness of the underlying transactions.

There were several ways that this fraud could easily have been stopped:

1. 1.Bank statements could have been sent directly to the treasurer rather than to the management company. By doing so, the treasurer would have noted the fraudulent checks.
2. 2.The board could have insisted upon on annual review or audit. While there’s no guarantee that a review or audit would catch such activity, there is a strong possibility that it could.
3. 3.The board could have carefully reviewed the financial statements and the budget, making actual comparisons, and questioned why there were additional unbudgeted expenditures.
4. 4.The board could have reviewed bank reconciliations and examined bank statements and canceled checks. By doing so, the fraudulent checks could have been discovered.

Unfortunately, most of the associations had board members that were either apathetic, did not understand their duties and responsibilities, or did not possess the skills necessary to review and analyze the financial records. Only one Association escaped this fraud. They did it simply by having a strong treasurer who demanded monthly financial statements and bank reconciliations along with bank statements, and he looked at them every single month. The manager took no funds from this Association, for she could not have done so without being discovered.

This manager was able to steal approximately $160,000 over a two-year period. Upon discovery, she admitted to the scheme and provided details. All of the monies stolen were in fact used for her daughter's medical bills, and none were used to benefit the manager personally. That is what makes this such a heart-wrenching story. The manager ultimately was sent to prison for her crime.

One Association that suffered a relatively small loss at the hands of this manager did make a claim against their insurance company for the funds stolen under the terms of their crimes policy. The insurance agent had already been in contact with the insurance company and notified the Association that the insurance company was denying the claim. Their reasoning was that the Association had made certain representations in their insurance application regarding their practices and procedures to protect Association funds, which included reviewing financial statements and bank reconciliations and signing checks. As the insurance company pointed out, the Association had failed to perform its duties; therefore, the insurance company would not be liable for the loss. The Association’s attorney advised the insurance agent that if the insurance company would not pay under the crime policy, then a claim would be made under the board errors and omissions policy. As he said, “One way or the other, you will pay, or it will be a bad faith claim.” The insurance company paid the claim.

There are probably dozens or even hundreds of such stories similar to this one throughout the industry. This one was particularly touching simply because of the motive of the person stealing the Association funds. From the Association’s perspective, however, the lesson to be learned is that the Board of Directors needs to do its job to make sure the Association funds are safeguarded.

Almost every manager experiences difficulties with Association members at some point in time, but board members can also catch their share of grief. Governing a homeowners’ association can be challenging. Though there are many personalities and attitudes to deal with, former board members who become argumentative and angry represent a special group, especially if they lose a contested election to someone holding an opposing view. Because of their former leadership role on the board, they can often develop a following of members. If they are particularly vocal in their disagreement, they can become disruptive to Association operations. Occasionally, some people even go a step further, carrying out completely inappropriate actions, such as sending wrathful emails or spreading untrue rumors.

An instance several years ago demonstrated to me how bad it can get. One board member was very insistent that, because the board had made a tax election to “roll over” excess income to the following year, the board was “required by (tax) law” to refund that excess to the members immediately. Another board member joined him in this interpretation. The board consulted with their CPA, who stated that there was no such requirement. But why let facts get in the way? Still upset that he had lost a contested election, he became even more vocal as a former board member.

Inappropriate activities followed, including sending accusatory emails to board members, spreading false rumors, disrupting board meetings, harassing professionals hired by the Association, establishing an “anti-Association” website which included statements taken out of context (partial sentences grabbed from his opponents that were reconstructed to indicate the exact opposite of what was said), and even making complaints of fraud to the police department and IRS. This continued for months because, although every professional consulted with disagreed with this former board member, he refused to accept any position other than the one he had staked out. The complaint to the IRS actually resulted in an IRS audit that cost the Association a small amount of money. The IRS audit defense costs were higher than the tax paid.

It also seemed that any member that had a complaint against the Association for any reason joined with this individual, because he was “leading the charge” against the existing board. The net result was that this individual created considerable acrimony in the Association, and ended up costing all members money because of his antics. But because he had developed a loyal following, he was actually re-elected to the board at the next election. That slowed him down, but at least he now had a voice back on the board. It was widely believed that he had made so much noise as a former board member just to keep the spotlight on himself.

That series of events caught the Association somewhat unprepared to respond to those kinds of personal attacks against board members. Although it was a little too late to make a difference in the above instance, that Association later developed a set of general guidelines for the Association and board members to follow:

• Always take the high road. Don’t get embroiled in heated discussions. Stick to the facts.
• Always refer to the Association documents for support of positions taken by the Association. Try to answer any questions or comments by applying them to a rule or regulation within the documents.
• Have a process in place for logging and responding to member complaints.
• Board members should be addressed as a unit and not individually. Bring all complaints to the board meeting for discussion. If they are unjustified, they can be acknowledged, placed in the minutes, and then tabled. If the complaint is found justified, discuss it. Then discuss how to fix the issue and follow through.
• If a resident feels the Board has broken any rules, it is his or her job to prove so. Documentation is the key to support the Association’s actions.
• If incorrect information is being provided to members by a third party, the Association can respond with newsletters or notices that state the facts. These communications should be careful to not further inflame a situation.
• The Board’s actions should be open and transparent. Boards are allowed executive session meetings only for very limited purposes. All other business should be conducted in open session, with due notice to members of matters to be discussed.
• Board members have a duty of confidentiality to the Association and other board members.

Open communication with the community is important at all times, but particularly when unfounded accusations are made. The Association should always keep members informed about what is happening, or not happening, within the community. The Board is the voice of the community. They have been voted to a position of authority and leadership, and it is their job to keep members up to speed on all actions taken by the Board. Minutes of meetings must be available, and all meetings should be open. Do not do anything in secrecy unless you are discussing personnel, litigation, or contract negotiations. Always try to be as transparent as possible.

One caveat relates to the “send all” option in email communications. If you have seen the television commercial regarding the guy trying to grab everybody’s computer before they can read the email he sent after inadvertently hitting “send all,” you understand. One advantage of email communications is that email is a quick response vehicle and establishes a permanent record that, while it can be misunderstood or misconstrued, can’t be modified by a recipient to say something else entirely. One disadvantage of email communications is that email establishes a permanent record that may not be what you really wanted to say. Emotions and context aren’t communicated in email, just text. Email can be easily misconstrued. It’s best to always stop, count to ten, and then compose your email. It’s also always a good idea to have a separate email account for Association business. Keep it separate from your personal email account. Your email is discoverable in the event of litigation.

Remember that there will be homeowners with differing opinions. That’s generally a good thing, as it forces all parties to consider alternate positions that they may not have considered. Listen to the homeowners’ concerns and opinions. Consider if they can easily be resolved. Consider how many people feel an issue is important. Consider if actions are cost-effective and reasonable.

Some people can go too far. The situation described above is a clear example of someone with whom you could not reason. If a board member is a victim of libel or slander, then it’s time to consult with an attorney to discuss options. It’s even been suggested that in more extreme situations, it may be helpful to hire a mediator to assist in the communication and resolution process.

No matter how the situation arises, board members were elected to a position of leadership because people thought they could do the job. Board members should lead with patience and professionalism, and more importantly, integrity.