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The IRS is Auditing S-Corporations

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Audit Target ‘Hot List’

IRS is targeting S corporations and other entities that have made an S corporation election (“S-Entities”), according to a recent issue of The Kiplinger Tax Letter. The IRS suspects that compliance in certain areas is lacking and is ramping up S-Entity audits.  The hot list of targeted S-Entity issues includes:

  • Failing to legally document shareholder and owner loans to the company with written promissory notes and other evidence of indebtedness
  • Not properly reporting gains on distributions of appreciated property to owners
  • Neglecting to document owner compensation with employment agreements
    • The IRS is aware of low wage compensation and high S-distribution schemes to avoid FICA and other payroll deductions
  • S-Entities previously converted from C corporation (having accumulated earnings and profits) to S-Entity status, not properly reporting distributions as being taxable as dividends
  • Cash or property distributions by S-Entities to owners in excess of stock basis not being properly reported
  • S-Entities that were previously C corporations failing to properly report S-Entity built-in gains taxes 
    • The S-Entity built-in gains tax is a 21% tax paid on the gains from sales of assets owned before a C to S conversion where such assets are sold within five years after the conversion
  • Owners of S-Entities can deduct losses only up to the sum of (a) their Entities stock basis and (b) loans to the S-Entity that they properly make and document to the S-Entity
    • Many owners do not properly track the correct stock basis causing tax problems

S-Entity owners should consider contacting the tax attorneys at Kelleher & Buckley, LLC to address compliance.  For more information on how our Tax and Wealth Structuring Practice Group can assist you, please call Andrew Kelleher, David Buckley, Vas Russis or one of our other 25+ attorneys at (847) 382-9130, or request a free consultation online.

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