(Form 1120S does not ask for the amount of shareholder compensation, which is ironic since the IRS is looking for underpaid shareholders, not underpaid officers.) Since the officer group may include employees who are not shareholders, total officer compensation may exceed total shareholder compensation. On Form 1120S, line 7 on asks for the total amount of compensation paid to officers. But preparers also need to identify all of the officers, including any who may consider their ownership interest in the company to be an interest in a passive activity under Sec.
Tax return preparers must be careful to know who the shareholders are, so that Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc., can be prepared correctly. Use these nine steps to help S corporations reduce the likelihood of an IRS examination. In response, owners want CPAs to carefully avoid the red flags that trigger these audits. IRS audits of S corporation income tax returns can result in an increase in the payroll taxes the corporation owes, as well as interest and penalties. Income Tax Return for an S Corporation, and preparing accurate tax returns, CPAs can help these companies reduce their chances of being audited. By understanding how the IRS evaluates data on Form 1120S, U.S. Therefore, one of the IRS's hottest audit triggers for S corporations is insufficient compensation paid to shareholders. Since compensation is subject to employment taxes (including Federal Insurance Contributions Act taxes) and distributions to shareholders are not, S corporation owners often reduce their compensation and increase their distributions.
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