3 Reasons S Corps May Raise Tax Audit Red Flags. . --  Kiritsis Law Firm Group 212 922 0005

Apr 27, 2021

Congenital wisdom is that S Corps are less NOT more likely to be audited, but there are situations, where conventional wisdom may under certain circumstances be wrong.

1. Tax filing mismatch. S Corps generally require anonymous consent forms, annual filing of Form 1120S, issuances of K 1s, W 2s for employees (including shareholder employees), and subsequent filings of Forms 1040 by its shareholders and/or employees. The law of averages, says there may be s higher a tax filing mismatch, which could possibly lead to a tax audit.

2. Not paying enough compensation to employees. One of the benefits of S Corp tax election is its ability to potentially lower self-employment taxes. However, failing to pay a salary high enough that could be construed as reasonable compensation by the IRS could trigger IRS scrutiny, and the accompanying knock on the door by a tax auditor.

3. Paying too much compensation to employees. Unlike the previous reason, paying so much compensation to shareholder employees that drives them to the point of illiquidity, as well as, causing S Corps to sell assets and/or accumulate business debt to pay out shareholder compensation, could also be a trigger for a tax audit.

 

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