The IRS on June 21, 2012 released a report regarding their review of S corporation tax returns filed during the five year period ending in 2011. During this period, the IRS audited 53,544 S corporation tax returns. This was a 54% increase over the previous five years. For each return audited, the IRS generated about $105,000 of net adjustments to the returns.
However, when the IRS did a more thorough audit on DIF (their way of pulling statistically valid samples) selected returns, about 62% of those returns showed no adjustment at all. This means that the substantial majority of S corporation filers are accurately filing their income tax returns.
Some statistics from the report are interesting. There are now 4.5 million S corporation tax returns, double the rate of C corporation returns. These returns generate gross income of almost $6 trillion. Net aggregate profits averaged about $350 billion and net aggregate losses were about $100 billion for each year. Total gross property was about $3.4 trillion which almost doubled over the preceding 10 years.
One area of focus is on S corporations that reports three consecutive years of losses will be more closely scrutinized for potential audit.
The report is only 23 pages long, but even most tax geeks would consider it not the most interesting read other than the statistics shown above. If you really want to read the report, you can access it here.
Paul Neiffer, CPA