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S CORPORATIONS: PREPARE TO BE 'RESEARCHED'

July 26, 2005

rat.JPGIn the old days they were called "audits from hell." Under the "Taxpayer Compliance Measurement Program," the IRS subjected a randomly-selected group of taxpayers to an incredibly thorough review of their finances. In addition to the sadistic enjoyment, the IRS got a major benefit from the process: they learned where to focus their examinations to get the best use of their limited number of auditors.

Of course, "audits from hell" is a poor marketing slogan, so the IRS has rebranded the process as the "National Research Project." It still sounds sinister enough.

Several thousand individuuals underwent research in the past three years. Now the IRS "researchers" are turning their attention to S corporations:

WASHINGTON Internal Revenue Service officials announced today the launch of a study to assess the reporting compliance of S corporations. The study, carried out under the National Research Program (NRP), will examine 5,000 randomly selected S corporation returns from tax years 2003 and 2004.
Hmmm. Roth & Company is an S corporation...

Program officials expect these audits to begin later this year. The last reporting compliance study of S corporations involved about 10,000 returns from tax year 1984, prior to the tax law changes that spurred the growth in S corporations. The new NRP initiative will use a study approach designed to reach statistically valid conclusions regarding compliance behavior, while using a smaller sample of returns than in the past.

The results of the NRP study will be used to more accurately gauge the extent to which the income, deductions and credits from S corporations are properly reported on returns filed by the flow through corporations and their shareholders. When completed, this research will assist the IRS in selecting and auditing S corporation returns with greater compliance risk.

Then don't pick our return - it's already perfect, you'd be wasting your research resources. Please?

We'd feel better about the process if the IRS press release didn't have a glaring technical error:

Numerous restrictions and requirements apply to S corporations. For example, an S corporation can have no more than 75 shareholders and none of these can be another corporation or non-resident alien.

The limit was raised to 100 shareholders effective January 1, 2005. But no, we mean no disrespect! Don't research us!

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