S Corporations and the Tax Gap

In December 2009, the GAO released a report, Actions Needed to Address Noncompliance with S Corporation Tax Rules, detailing a variety of errors found on S corporation returns. These include:

• misreporting income
• shareholders claiming losses greater than their basis
• deduction of personal expenditures
• not paying adequate compensation to employee-shareholders

The income misreporting problem generates at least an $8.5 billion annual tax gap. The GAO found that the error rate among returns prepared by paid preparers was not much different from returns that were self-prepared.

I've got a short article on the report, and the relevance of the key findings - S Corporations, Complexity and the Tax Gap, AICPA Corporate Taxation Insider (1/28/10).