IRS Issues Notice That It Will Focus Its Microscope On S-Corps

 

 

Due to the phenomenal growth of S-corporations over the past 20 years, the IRS has recently announced that it is getting ready to measure S-corp and shareholder compliance.  In its announcement, the IRS indicated that it would randomly select for examination 5,000 S-corp returns filed for tax years 2003 and 2004.

 

The number of S-corps has gone from 10,000 in 1984 to over 2,000,000 in 2002.  The IRS will be focusing on the extent to which the income, deductions and credits from S corps are properly reported on form  1120S and on the personal returns of each shareholder.

 

If you are a shareholder of an S-corporation you may wish to consider the following:

 

Collect in one place all of your S-corp election documents, both federal and state, and check these for accuracy and completeness.   Most recently the IRS sent written acknowledgments of the receipt of S-elections, and if you have an acknowledgment include that in your file.

 

Ask your accountant or advisor to review the S-corporation attributes filed for the calendar years 2002, 2003 and 2004.  The statute of limitations for the calendar year 2002 is open and would close as of April 15, 2006 for timely filed returns.

 

Review the minutes of the Board of Directors and look for authorizing resolutions for the payment of dividends.  The fact that a corporation has elected to be taxed as an S-corp does not override state law.   Accordingly, subchapter S distributions are technically dividends under state law, and dividends should be properly authorized by the Board of Directors.

 

We will keep up to date on this subject, and we would be interested in hearing from any of our readers as to the results of an IRS examination audit under these new guidelines.                                                             

 

— Mike Beausang