Is Your S Corp a Big Fat IRS Red Flag? | USTaxAid

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Is Your S Corp a Big Fat IRS Red Flag?

Written by Diane Kennedy, CPA on February 23, 2010

crossAt the end of January, the General Accounting Office (GAO) issued a startling report regarding S Corporations. They found that 68% of them were filed wrong.

When you consider that there are more S Corp tax returns filed then any other business return out there, I think it’s not hard to figure out where the IRS is going to be concentrating their attention soon.

Over the next few days, I’m going to be covering a few of the most common errors and how you can avoid them. I’d suggest you read all of this before you file your S Corporation tax return for this year. Plus, you may want to just put it on extension and join us for the March coaching sessions when we cover both C Corporation filing issues and S Corporation filing issues.

First up on the IRS hit list for S Corporations: reasonable compensation. The GAO report is calling for the IRS to create more objective strategies for determining what is reasonable, both as a way to help auditors and to help taxpayers determine the right amount.

One thing all can agree on, though, if you have an S Corporation you need to show a salary for officers. If you don’t, you’re just asking for an audit and count on all income being re-characterized as salary with the resulting tax, penalties and interest.

S Corp Filing Tip: Make sure you have a salary amount being paid to officers and properly reported on the correct line item of Form 1120S. The one exception is if your S Corporation did not have income for the year.

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