Recent IRS S Corporation Initiative: Losses in Excess of Basis, Taxable Distributions, Handling the Examination

The IRS has ongoing compliance campaigns targeting S corporations under its Large Business & International Division (LB&I). Of these, basis examinations may be the most problematic for tax practitioners.

The rules for calculating basis are complex but essential for deducting losses. Partners' loans are often used to increase the basis in a partnership. For S corporation shareholders, these rules are not so liberal. The LB&I is aware that some S corporation shareholders deduct losses above basis and perform basis audits of shareholders reporting significant losses. New Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations, is being added to make it easier for the IRS to track shareholder basis.

Additionally, the IRS is also focusing on another area of noncompliance, distributions to shareholders that should be taxed, including distributions that are dividends, distributions of appreciated property, and distributions in excess of basis.

With S corporations under such scrutiny, tax advisers working with Subchapter S corporations must properly report basis, distributions, and built-in gains. Tax practitioners must not only grasp how to tax S corporation shareholders properly; they must also understand how to represent these taxpayers throughout an IRS examination.

Listen as our panel of S corporation experts reviews the current IRS focus on S corporation shareholders, including audits of basis, distributions, high net worth taxpayers with flow-through entities, and built-in gains, including documenting and complying with current guidelines properly.