Good news for S corporations and other closely-held businesses! Ways and Means Chairman Charles Rangel (D-NY) indicated yesterday that he plans to put together a package of small business provisions to be coupled with the minimum wage increase that has already passed both the House and the Senate. This announcement reverses the previous position of the House leadership, who had indicated they wanted to send the President a “clean” minimum wage bill. As BNA reports:

House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) said Feb. 6 that the House would put together its own tax package to be married with minimum wage increase legislation (H.R. 2) in the Senate, but gave no indication of the size of the package or what it would include. Rangel had previously given little indication of his plans for the future of the minimum wage increase. The House passed a minimum wage increase as a stand-alone measure Jan. 10 and the Senate approved an increase with an $8 billion tax package Feb. 1. He told BNA Jan. 30 that the $8 billion Senate package was too expensive and would use up too many revenue raisers.

Your S Corp team has already started discussions with House tax writers on the importance of including S corporation reforms in this package, and of making sure the provisions take effect immediately to offset any increased labor costs from the higher minimum wage. Expectations is that the Ways & Means Committee will mark-up its bill as early as next week. We’ll keep you apprised of any progress.

S Corp Audits Back in the News

Remember the National Research Program over at the IRS? This project is designed to give the IRS better information regarding tax compliance and the “tax gap.” The NPR began by looking closely at high-income individuals. Next, NPR targeted 5000 S corporations for intensive audits to identify better means of ensuring their compliance with the tax laws.

Yesterday, the Treasury Inspector General for Tax Administration (TIGTA) released a progress report on the audits. While the report itself focuses on the technical challenges faced by auditors, there were a couple of interesting points. First, TIGTA observes that, for 2005, there were 3.6 million S corporations, a significant jump from previous years. We’ll have to update our website! Second, 99 percent of the 5000 audits have been initiated, and 17 percent are complete to date.
Finally, BNA’s coverage of the report reflects one of our principle concerns with the audits. The IRS is looking only at S corporations right now. Partnerships are not being studied, even though the LLC community is, by many accounts, growing faster than the S corporation community.

The S corporation research project emanated from a pilot study conducted in 2004 involving about 130 audits of S corporations and partnerships. IRS decided to focus on S corporations for the NRP project to determine how agency auditors could “do a better job” of auditing the flowthrough entities, IRS Research, Analysis, and Statistics Director Mark Mazur said at an August Senate Finance Committee hearing. The NRP project is auditing about 1,200 taxpayers from tax year 2003 and about 3,800 audits from tax year 2004. The audits will focus on taxpayers’ Forms 1120S.