GAO: 68% of S Corp Tax Returns Have Errors - The Government Accountability Office today released Tax Gap: Actions Needed to Address Noncompliance with S Corporation Tax Rules (GAO-10-195).
The Government Accountability Office today released Tax Gap:
Actions Needed to Address Noncompliance with S Corporation Tax Rules
(GAO-10-195):
According to IRS data, about 68% of S corporation returns
filed for tax years
2003 and 2004 (the years data were available) misreported at least one item.
About 80% of the time, misreporting provided a tax advantage to the corporation
and/or shareholder. The most frequent errors involved deducting ineligible
expenses, which could decrease S corporation shareholder tax liabilities. Even
though a majority of S corporations used paid preparers, 71% of those that did
were noncompliant. Stakeholder representatives said that preparer mistakes may
be due to the lack of preparer standards as well as their misunderstanding of
the tax rules. Shareholders of S corporations also made mistakes in calculating
basis – their ownership share of the corporation – when taking losses passed to
them from the corporation, potentially decreasing their total taxes. IRS
officials as well as stakeholder representatives said that calculating and
tracking basis was one of the biggest challenges for shareholders, and that S
corporations themselves were in a better position in most cases to calculate
basis for their shareholders.
To improve compliance with shareholder basis rules, Congress
should require S corporations to calculate and report shareholder’s stock and
debt basis as completely as possible. S corporations would report the
calculation on the Schedule K-1 and send it to shareholders as well as IRS. If
Congress judges that stock purchase price information that is currently only
available to shareholders should not be transmitted to the S corporation due to
privacy concerns, an alternative is to require that S corporations report less
complete basis calculations using information already available to the S
corporation.
To help address the compliance challenges with S corporation
rules, we recommend that the Commissioner of Internal
Revenue Services take the following four actions:
•Identify and evaluate options for improving the performance
of paid preparers who prepare S corporation returns, such as licensing
preparers and ensuring that appropriate penalties are available and used.
•Send additional guidance on S corporation rules and
record-keeping requirements to new S corporations to distribute to their
shareholders, including providing guidance on calculating basis and directing
them to the specific IRS Web site related to S corporation tax rules.
•Require examiners to document their analysis such as using
comparable salary data when determining adequate shareholder compensation or
document why no analysis was needed.
•Provide more specific guidance to shareholders and tax
preparers, such as that provided to IRS examiners, on determining adequate
shareholder compensation through means such as IRS’s Web site.
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