Two additional campaigns result in focused examinations as IRS audits target S-Corporation losses and “Basket” transactions. A separate “campaign” has been structured to target S-Corporation losses that exceed basis for that company. The IRS has organized internal professionals with specialized expertise to target heavy losses and deductions in S-Corporations, who by their nature pass through income, deductions and credits directly to their shareholders in proportion to their ownership interest in the S-Corporation. When the amount of the losses exceeds the taxpayer’s basis in the S-Corporation an IRS audit is sure to result.
A shareholder’s basis in an S-Corporation basically reflects the amount they have invested in S-Corporation. In the context of an S-Corporation “basis” can change year-in and year-out as the shareholder’s investment in the S-Corporation changes. The basis of an S-Corporation’s shareholder is affected by annual income, distributions, loans, losses and credits each year. The calculations required to correctly establish the basis of a shareholder’s position in an S-Corporation is crucial as it establishes the specific amount the shareholder can receive or withdraw from the entity without realizing a taxable gain or income.
The original basis should be established by the shareholder’s financial investment into the S-Corporation. Adjustments should be calculated each year, modifying the basis based upon income, distributions, deductions and losses. The order of the calculation is important as well as accuracy as the IRS audits target S-Corporation losses that exceed the shareholder’s basis. This calculation is one of the most critical elements of an S-Corporation shareholder’s tax return as the basis establishes limitations on the use of losses, deductions and credits. The S-Corporation shareholder may only deduct those items up to the amount of the basis of their shares and any amount of money they may have loaned to the S-Corporation in that tax year.
Unfortunately off-the-shelf “turbo” solutions often neglect this important calculation or it is manipulated through inaccurate data entry by the taxpayer. It is often simply ignored by taxpayers when S-Corporations limit distributions or have a series of non-productive years. This can be exacerbated when the S-Corporation closes, is sold or when a shareholder substantially increases their percentage of ownership in the entity. Allen Barron’s expert CPA, accounting and tax preparation services can help to review, correct and file amended returns to reduce the likelihood of an expensive extended audit. Our experienced tax attorneys provide the protections of the attorney-client privilege so that you may disclose all information in strict confidentiality, protected from the legal reach of the IRS.
If you are a shareholder in an S-Corporation that has experienced heavy losses or passed on deductions or credits in the past few years we invite you to contact us for a free consultation at 866-631-3470. The IRS has announced the organization of a special team and its internal data systems are separating out the returns of S-Corporation shareholders for internal review as IRS audits target S-Corporation losses deductions and credits.