The IRS release issued Monday that announced a program of random "research" audits of S corporations said "Program officials expect these audits to begin later this year." It appears that the "program officials" may be a bit behind the times.
A practitioner friend has one of his S corporations currently under examination. His IRS agent said that his exam was, in fact, a "reseach" audit. The focus of the 'research' appears to be smaller S corporations - say, those under $10 million in assets. Based on his experience, it would appear that the IRS is paying special attention to:
-whether salaries paid to owners are too small (the so-called "John Edwards issue";
-whether the owners of S corporations are treating their share of S corporation items from their K-1s properly on their own returns;
-related-party transactions (e.g., between S corprorations and their shareholders).
AUDITS FROM HECK
The "reseach" audits performed in the last few years on individuals were less onerous than the old "audits from hell" under the defunct Taxpayer Compliance Measurement Program. While a few individuals got the full line-by-line treatement, the "National Research Project" examinations tended to focus on specific areas - schedule C reporting, for example. These were less than audits from Hell - you might call them "audits from Heck."
The S corporation audits are likely to take a similar approach, based on our friend's experience. While a few S corporations are likely to get the full internal probe, most will get examined in more narrow areas, as happened with our friend.
Prior Coverage: S CORPORATIONS: PREPARE TO BE 'RESEARCHED'
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