S Corporation owners be advised IR-2005-76 - ask

I do not usually pass IRS bulletins on but this one will have
ramifications for many of our readers.
July 25, 2005
IRS Launches Study of S Corporation Reporting Compliance
WASHINGTON – Internal Revenue Service officials announced today
the launch of a study to assess the reporting compliance of S
corporations. The study, carried out under the National Research
Program (NRP), will examine 5,000 randomly selected S corporation
returns from tax years 2003 and 2004.
S corporations are entities whose income and deductions pass
through the corporate structure to the shareholders. Since the
mid-1980s, the number of S corporations has risen rapidly,
growing from 724,749 in 1985 to 3,154,377 in 2002.
The growth rate has been even faster among S corporations with
more than $10 million in assets.  From 1985 to 2002, the number
of these larger S corporations grew more than ten-fold, from
2,305 to 26,096.
 “The use of S corporations has exploded,” said IRS Commissioner
Mark W. Everson. “The IRS needs a better understanding of what
this means for tax compliance. This research is critical for
achieving our strategic goal of ensuring that corporations and
high-income individuals are paying their fair share.”
S corporations are now the most common corporate entity.  In
2002, the latest year for which data is available, S corporation
returns accounted for 59 percent of all corporate returns filed
for that tax year. Two million S corporations reported net income
of about $248 billion and 1.2 million S corporations reported net
losses of about $63 billion.
Numerous restrictions and requirements apply to S corporations.
For example, an S corporation can have no more than 75
shareholders and none of these can be another corporation or
non-resident alien.
Program officials expect these audits to begin later this year.
The last reporting compliance study of S corporations involved
about 10,000 returns from tax year 1984, prior to the tax law
changes that spurred the growth in S corporations. The new NRP
initiative will use a study approach designed to reach
statistically valid conclusions regarding compliance behavior,
while using a smaller sample of returns than in the past.
The results of the NRP study will be used to more accurately
gauge the extent to which the income, deductions and credits from
S corporations are properly reported on returns filed by the flow
through corporations and their shareholders.  When completed,
this research will assist the IRS in selecting and auditing S
corporation returns with greater compliance risk.
The research program on S corporations is a complement to the
study of individual reporting compliance completed last year. The
preliminary results from that study, announced in March,
indicated that the gross tax gap is more than $300 billion each
year.  IRS collection and compliance efforts reduce this gap by
about $50 billion each year.
The NRP, created in 2000, is a comprehensive effort by the IRS to
measure payment, filing and reporting compliance for different
types of taxes and various set of taxpayers.
Administering a tax system that serves America’s taxpayers by
promoting fairness and operating efficiency and effectiveness is
dependent on the agency’s ability to measure and distinguish
between the many factors that impact compliance with tax laws.
“This research effort provides us the knowledge we need to both
improve compliance and reduce unnecessary taxpayer burden,” said
Without reliable measures, the IRS faces major challenges in
enhancing its ability to detect non-compliance, improve overall
compliance and develop methods for allocating resources more
  a.. IR-2005-38, New IRS Study Provides Preliminary Tax Gap
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