"Top S Corp Audit Risks & How to Avoid Them"

The article outlines common audit risks faced by S Corporations, including income misclassification, profit allocation errors, unreported fringe benefits, improper deductions, and compliance failures, along with actionable tips to minimize these risks. By maintaining accurate records, adhering to IRS rules, and ensuring timely filings, S Corporations can reduce their audit exposure and safeguard their tax status.

Audit Risk	Explanation	Tips to Minimize Risk
Misclassification of Income	S Corporations might misclassify income as distributions rather than wages to avoid payroll taxes.	Ensure reasonable compensation is paid to shareholders actively involved in the business. Use industry benchmarks to justify wages.
Incorrect Allocation of Profits	S Corporations must allocate profits based on ownership percentages. Incorrect allocations can trigger audits.	Maintain accurate records of ownership percentages and ensure distributions comply with IRS rules.
Unreported Fringe Benefits	Shareholder-employees might fail to report taxable fringe benefits like personal use of company vehicles.	Track all fringe benefits provided to shareholder-employees and report them appropriately on their W-2 forms.
Improper Deductions	Deducting personal expenses or non-business-related expenses can raise red flags with the IRS.	Separate business and personal expenses, and maintain documentation for all deductions claimed.
Failure to File Form 1120S	Not filing the required Form 1120S or filing it late can lead to penalties and increased IRS scrutiny.	File Form 1120S on time and ensure all required schedules are accurately completed.
Errors in Shareholder Basis Calculations	Inaccurate tracking of shareholder basis can result in incorrect deductions or tax liabilities.	Keep detailed records of shareholder capital contributions, distributions, and share of profits/losses.
Failure to Meet S Corporation Requirements	Violating S Corporation eligibility rules (e.g., exceeding shareholder limit or having ineligible shareholders) can lead to termination of S Corporation status.	Regularly review compliance with S Corporation requirements, such as shareholder limits and entity types.
Excessive Home Office Deduction	Overstating home office deductions can invite IRS audits.	Ensure home office deductions are calculated accurately and the space is exclusively used for business purposes.

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