As a follow-up to its broader “Tax Gap” study completed last spring, the IRS yesterday announced it will engage in a multiyear study of about 5000 taxpayers reporting S corporation income or losses. According to the IRS release (see below), the study “will be used to more accurately gauge the extent to which the income, deductions and credits from S corporations are properly reported on returns filed by the flow through corporations and their shareholders.”

The S Corporation Alliance strongly supports appropriate IRS administration of the tax code, but numerous questions arise from the IRS announcement, including why the IRS has chosen to focus solely on S corporations, rather than all business types - C corporations, LLCs and other partnerships, and sole proprietorships. We’ll provide more information as it becomes available.


Over the past two weeks, we’ve met with tax counsels for Senate Majority Leader Frist and Senators Lott and Lincoln. All three indicated that timing on a Senate Finance Committee Social Security reform proposal is still uncertain, but that it is helpful that we are out there educating staff about the harmful nature of the tax increase proposal. There seems to be a consistent refrain that this issue is very much alive and something the tax writers continue to focus upon.


Remember the Treasury Inspector General for Tax Policy’s recommendation to greatly - and unfairly - increase the application of payroll taxes on S corporation income, regardless of whether the income is due to capital investment, or even distributed? Senator Lincoln, a long-time friend to small and family-owned businesses, has helpfully submitted questions to pending Treasury nominees, asking them if this is indeed the position of President Bush’s Department of Treasury. Eagerly anticipated answers to follow.


The S Corporation Alliance is still working to get additional signatures on our letter opposing the proposed payroll tax increase on S Corporations. We are currently at 38 signatures but there is always room for a couple more. Keep up the good work and keep those names coming!


The President’s tax reform panel met last week to make some baseline decisions in anticipation of their September 30th report deadline. According to the documents released during the meeting, Chairman Mack has divided his panel into four separate working groups, each tackling the tax code from a different perspective:

  • Complete replacement of the current tax code;
  • Hybrid tax system;
  • Fundamental reform within the existing code; and
  • Partial replacement of the existing tax code.

While Senator Mack suggested these titles don’t necessarily foreshadow the final recommendations of the panel, they certainly provide a strong clue where the panel is headed. Moreover, discussions during the panel meeting left the strong impression the panel, even with its more moderate reform recommendations, is taking a strong look at consolidating business structures within the tax code into a single business type. Friends of S corporations, LLC’s, and sole proprietorships take note. The S Corp Association will continue to monitor the panel’s progress.