For several years, I have been trying to explain that there are several pitfalls to choosing to use the supposedly sexy S corp format instead of a plan Jane C corp.  Several months ago, an IRS auditor told me that his upcoming projects would involve in-depth reviews of pass-through entities, such as partnerships and S corps.  This project would include following every single pass-through item from the K-1s into the owners’ 1040s.

IRS has now officially announced the upcoming commencement of an in depth study of 5,000 randomly selected S corp tax returns for the years 2003 and 2004.  Their reason is the tremendous growth in the use of this format, which as I have pointed out on several occasions, is due to widespread ignorance on the part of small business owners who jumped into this without having the foggiest idea of what the repercussions were, just because they heard from someone that S corps are the best way to operate. 

 Joe Kristan appropriately compares this to the more well known 1040 audits from Hell, where IRS analyzes every single item on the victims’ tax returns in order to fine tune their audit selection criteria.  Every S corp shareholder should have their fingers crossed that their corp isn’t one of the unlucky 5,000 to be chosen by IRS. You need to remember that, if your corp is selected, your 1040 will also be part of the IRS examiner’s audit; so it could very easily open an extremely messy can of worms.    

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/26/2005 12:00:00 PM Send this post: