S Corporations are now the second most common business entity after sole proprietorship. Based upon their popularity the IRS has increased its scrutiny of them. The three areas they are focusing on are as follows:
- Misreporting items
- Personal expenses on the S corp return.
- unsubstantiated expenses – no backup
- Misapplied expense limitations – penalties or fine disallowance rule, gifts over $25.
- Incorrect basis calculation. This one they are definitely going after.
- Failure to pay adequate wages to shareholder employees. The owner trying to get out of paying FICA.
Now is the time to cleanup and verify FY2010. The IRS is hiring more and more bodies to be auditors. Everyone will be open for scrutiny. My guess is especially if you have a loss, but a profit recorded by itself will not stop the audit train.