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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

IRS to audit S corporations

Associated Press

NEW YORK— The owners of what are called Subchapter S corporations might be feeling a little uneasy: This popular corporate entity has caught the eye of the IRS, which says it’s going to step up the number of audits it does on S corporations over the next couple of years.

The IRS plans to examine 5,000 randomly selected S corporation returns from the 2003 and 2004 tax years. The audits will start later this year, and should all be completed within two to three years.

Bruce Friedland, an IRS spokesman, said there’ll be no difference between these audits and any other audit of a business. The audited companies will have to show their records to IRS examiners, who will determine whether income and expenses were accurately reported and whether the correct amount of tax was paid.

What’s different, he said, is that the government will cull information from these audits to analyze how compliant companies are with tax law, and to decide whether any changes are needed in tax policy or the Internal Revenue Code.

“The people being examined really shouldn’t notice a difference,” Friedland said.

S corporations are attractive to shareholders because they offer the same liability as the more traditional C corporations without double taxation. While C corporations and their shareholders are each taxed, with S corporations, the company itself is not taxed and the income passes through to shareholders in much the same way as it does in a partnership. The shareholders are then taxed on their income on their individual 1040 returns.