S Corps. under scrutiny.

According to IRS Associate Chief Counsel (Income Tax and Accounting) Robert Brown, the Service is intensifying scrutiny of S corporations as part of its program to measure tax compliance in various economic sectors. The agency's National Research Program is already partway through a pilot study measuring reporting compliance among partnerships and S corporations. A full-scale study of income reported by S corporations is expected to start in October 2005.

Statistics show that, apparently, business income is the largest portion of underreported income contributing to the tax gap. Because flow-through entities are the second largest entity type, the IRS is likely to continue its focus in this area.

According to Brown, S corporations are now the largest business entity type in the U.S. Congress has suggested that the agency take a closer look at compliance in this growing area.

Size and scope: As part of the forthcoming study, the IRS's Small Business and Self-Employed Division will examine 4,700 S corporation returns, while the Large and Mid-Size Business Division will audit 300. The study will include two tax years; its proposed start date is October 2005. According to Brown, the entire examination process will likely take three years. Each tax year would have an examination cycle of approximately 24 months.

Skills assessment: The S corporation study is an outgrowth of an existing pilot project that began in October 2004 and encompasses review of filed S and partnership returns. In addition to yielding compliance data, it is intended to provide experiential data on the methodology and logistics of conducting such studies. The pilot includes 130 returns split evenly between the two types of forms, in an effort to test the IRS's data capture systems and to assess examination skills and training needs.