The Internal Revenue Service on July 2 announced that it is launching five new compliance campaigns, including one that will seek to stop S corporations from abusing the rules governing pass-through entities.
Several rules restrict which companies can be S corporations. Some are simple rules that define an S corporation, such as the fact that the business must be based in the U.S. and have no more than 100 shareholders.
Other rules are more complex: These include provisions in the law that dictate whether an S-corporation distribution to a shareholder is taxable, and if so, to what extent.
The campaign—which will be undertaken by the Large Business and International Division — takes aim at three types of noncompliance resulting in underpayment:
- when an S corporation fails to report gain on the distribution of appreciated property to a shareholder;
- when an S corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend; and
- when a shareholder fails to report non-dividend distributions—in excess of their stock basis—that are subject to taxation.
To achieve its goal of increasing compliance in this campaign, the IRS aims to use three “treatment streams” (i.e. fixes): issue-based examinations, tax form change suggestions, and stakeholder outreach. Thus, owners/shareholders of S corporations should be on the lookout for changes to Form 1120S and Schedule K-1, as well as for communications from the IRS asking for input regarding these matters.
A full list of LB&I’s 35 compliance campaigns can be found here. For additional information, contact David Logan.