July 27, 2005--Internal Revenue Service officials announced on Monday that the organization will examine 5,000 randomly selected S corporation returns from the tax years 2003 and 2004 as part of a new study to determine the reporting compliance of the business entities. S corporations are the most common form of corporate entity, and are particularly attractive to small businesses because they allow for income and deductions to be passed through the corporate structure directly to the shareholders, avoiding double taxation.
Bruce Friedland, an IRS spokesman, said the study is designed to measure the extent to which the tax returns for S corporations are being properly reported, rather than looking out for criminal activity. "The focus of this study has more to do with compliance and eliminating the confusion corporations may have in filing returns; the IRS isn't using this study as a means to uncover willful tax evasion," Friedland said.
That may be of little comfort to those companies who happen to be among the S corporations randomly selected for audits as part of the study. "For those companies that happen to win this lottery, this will be a real thorn in their side," said attorney Richard Colombik of Tax Law Solutions based in Schaumburg, Ill. "Statistical audits tend to be much more in depth: They take more time to collect the data, and for those companies that choose to hire representation, they probably will be more costly," he added. In response, Friedland said "the audits in this study will be very similar to a standard exam, neither more or less intensive."
A similar study looking at the compliance of individual tax returns preceded this current study, leading Colombik to assume that studies of other business entities is likely to follow. "Logic dictates that if this is part of their procedure in updating their statistical databases, LLC's, partnerships and other entities are probably next in line." The last compliance study of S corporations dates back to 1984, prior to the tax law changes that spurred their growth. The number of S corporations has risen from 724,749 in 1985 to 3,154,377 in 2002.