Law 360, November 3, 2014
Larry J. Brant, a shareholder in the tax and benefits group of law firm Garvey Schubert Barer, discussed auditing risks for Subchapter S Corporations with Law360 reporter, Ama Sarfo, in a recent interview.
“It's estimated that the U.S. has a $450 billion gap between taxes that are owed to the government and taxes that are actually paid on time. The staggering number has put taxpayer compliance back in the forefront for the IRS, after it shifted resources in the 1990s away from auditing activity and toward information and technology building. Taxpayers need to be on their game because the IRS is back in the audit business, and penalties are stronger than they've ever been before,” said Brant.
Brant commented that the agency often audits Subchapter S corporations and their shareholders over unreasonably low compensation — an amorphous label that lacks a uniform standard within the courts and instead depends on questions of facts and circumstances. “What I tell our S corporation clients is that they want to annually document their compensation decisions and their rationale for shareholder employee compensation decisions,” Brant said. “This would include developing a compensation methodology based on qualifications, nature of work and information about what other companies pay. It's an art.”
Regarding loss deductions, Brant also pointed out that basis calculations can be difficult to make since S corporations aren't required to report basis on their annual distributions to shareholders. Sometimes, shareholders will be aware of their basis because they are heavily engaged in the company's inner workings.
The full article is available at www.Law360.com.