June 28, 2012. San Francisco, CA. Safe Harbor CPAs, a leading Small Business CPA firm, announces a new emphasis in assisting S Corp business facing potential IRS audits. S Corps face increased IRS audit risk due to the so-called ‘tax gap,’ the difference between all potential taxes and actual taxes collected by the Internal Revenue Service. S Corporations that ignore common audit risks or audit flags are particularly vulnerable to expensive audits by tax authorities. Safe Harbor CPAs now emphasizes working with S-Corporations to ensure tax compliance and avoid costly mistakes and audit risk.
“S Corporations are the second most popular form of business organization in the United States,” explained Chun Wong, CPA, managing partner at Safe Harbor. “Yet most businesses do not realize that certain audit flags exist that can increase the audit risk of S Corporations. We work with many small businesses to minimize audit risk, especially S Corporations. Many San Francisco businesses choose this form of organization because of its tax advantages.”
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S Corporation Audit Risk and Flags – The Big Picture
Except for the unincorporated sole proprietorship, the S corporation is the most popular form of small business in the United States. Yet the “tax gap” (the difference between what is owed to and what is collected by the IRS) has created strong incentives for the IRS to audit S Corporations throughout the United States, including San Francisco, CA, home to many technology and other start up small businesses. One area of particular interest is S corporation compensation practices. In particular, auditors’ eyebrows are being raised if salaries paid by an S corporation to its principal owner or owners look suspiciously low. One scenario involves a technique in which the S owner/employee draws a low salary to avoid employment taxes that ordinarily would be due on additional wages but would escape tax if passed through as dividends. A review of W-2 income and total distributions received by the S corporation owner-employee during the year may be in order for many businesses.
Another area of S Corporation complications arises from the fact that some S corporation income and expense items are subject to special rules and separate treatment for tax purposes, especially greater than 2% shareholders. Examples of separately stated items that could affect a shareholder’s tax liability on their individual tax returns include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and passive income or loss related to rental real estate activities. These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage.
Safe Harbor CPAs is a boutique CPA firm, located in San Francisco, CA. The firm works closely with small businesses to understand business practices such as employee / owner compensation and to structure these in legal ways that minimize not only taxes but also the risk of expensive audits. No audit is a good audit is the firm’s philosophy; as even a ‘winning’ audit can be an expensive use of company resources, time and money. The firm’s motto is ‘We work harder for you,’ and that means not just minimizing taxes but minimizing audit risk, by minimizing the audit flags common to S Corporations.
About Safe Harbor CPAs – a Professional CPA Firm in San Francisco
Safe Harbor CPAs specializes in accounting and tax services for individuals and businesses throughout the San Francisco Bay Area and greater California. Safe Harbor CPAs helps both individuals and businesses with tax preparation, IRS audit defense, and audited financial statements. The firm prides itself on friendly yet professional service and utilizes state-of-the-art Internet technology to provide quality customer service.
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