IRS Increases S Corp Audits

Since the mid 1990's more closely held businesses are being operated as Limited Liability Companies. These "pass-through" tax entities are not separately taxed. Rather, they are treated as Sole Proprietorships filing a Schedule C on the 1040, or as a 1065 Partnership. The other pass-through entity is a corporation that has elected "S" status. Even though a corporate tax return (1120S) is filed, the taxable income and losses are passed to the shareholders.

One "trick" recommended by some accountants to avoid social security and employment taxes is to misclassify employment income as business profits. The reasonableness of compensation and profit is an area of IRS audit concentration.

If you receive an audit notice, immediately call your tax lawyer.