S corporations have been growing in popularity over the years, and for this reason the IRS has been keeping a close eye on taxpayers that use their S corporation to take advantage of their benefits.
According to the National Research Program study, an estimated 68% of S corporation returns filed for years 2003 and 2004 misreported at least one item affecting net income. Of noncompliant S corporations, 80% underreported net income by understating income and/or overstating deductions.
Lack of basis on an S corporation tax return is one of the biggest problems facing the IRS when it comes to these types of tax returns. Since one advantage of S corporation status is the ability to offset other income with S corporation losses on the shareholder’s tax return, shareholders who claim losses beyond their allowable basis get an unintended benefit.
It is important for taxpayers who are claiming a deduction for a loss to attach a stock basis and debt basis calculation to their return when filed. If the taxpayer does not attach these items to their tax return, the IRS may flag the return for examination and sent out an audit letter directly to the taxpayer.