Small Business Reading Room

Friday, July 29, 2005

S Corporation reporting compliance is the subject of new IRS study

This week, the IRS announced that they will launch a new study to assess the reporting compliance of S Corporations.

The study will examine 5,000 randomly selected S Corporation tax returns from the years 2003 & 2004.

The IRS says they that this study is focusing on proper reporting, rather than looking out for criminal activity. IRS spokesman, Bruce Friedland, as quoted in
"The focus of this study has more to do with compliance and eliminating the confusion corporations may have in filing returns; the IRS isn't using this study as a means to uncover willful tax evasion,"

The last study of S Corp compliance was back in 1984. That was before the tax code was adjusted to make S corp a more tax-friendly entity. The total number of S corporations has risen from 724,749 in 1985 to 3,154,377 in 2002.

So if the goal is not to catch tax cheats, why does it matter?

For one, Audits can be expensive. Assuming that you'd require representation, your costs can add up- and it's probably safe to assume that this won't be a typical audit.

The goal is to find out where reporting mistakes are made. The IRS will be using a fine tooth comb to look for statistical data. Being through will not only allow the IRS to do a better job of education on proper reporting practices, it will also allow them to develop a profile to make it easier to red flag returns in the future.

Another reason why this is significant?

LLC's and partnerships should read the writing on the wall. It's not a huge stretch to assume that studies of other business entities are likely to be coming down the road in the future.


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Delaware Intercorp, Inc.
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