GAO Releases S-Corp Tax Compliance Report In response to a request by Senate Finance Committee Chair Max
Baucus (D-Mont.) and Ranking Member Charles Grassley (R-Iowa), the Government
Accountability Office (GAO) spent the last year looking into tax compliance by
the S corporation community. The GAO recently released a comprehensive
review of the challenges S corporation face when calculating their
taxes. The GAO examined various questions including why some
businesses choose to be S corporations, analyzed the types of S corporation
non-compliance, what the Internal Revenue Service (IRS) has done to address
noncompliance and what are the options for improving S corporation
compliance. To answers these questions, the GAO interviewed numerous
stakeholders, including NSBA. According to IRS data, roughly 68 percent of S corporation
returns filed for tax years 2003 and 2004 (the years that data were available)
misreported at least one item. Approximately 80 percent of the time,
misreporting provided a tax advantage to the corporation or shareholder. The
most frequent errors involved deducting ineligible expenses, which
decreased S corporation shareholder tax liabilities. Even though a majority of S corporations used paid
preparers, 71 percent of those that did were non-compliant. 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.
According to the report, IRS officials 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. The GAO report concludes and recommends that Congress should
require S corporations to calculate and report basis for their shareholders’
shares. The report also recommended that the IRS research options for improving
the performance of professional tax preparers, provide additional guidance to
new S corporations on calculating basis and compensation, require examiners to
document their analysis of compensation, and provide more guidance on
compensation. The IRS generally agreed with the GAO’s recommendations. |