United States

Soft letters will be first step in IRS' S corporation losses campaign


On April 26, 2017, officials with the IRS Large Business & International (LB&I) Division indicated that they could begin sending ‘soft letters’ to taxpayers in the near future as part of their new compliance campaign targeting taxpayers claiming losses from S corporations in excess of basis.

S corporation shareholders who claim losses are required to attach to their return a computation of their adjusted stock and debt basis in the corporation. However, the IRS has found that a large percentage of shareholders fail to attach these computations and instead are simply reporting what is reflected on Schedule K-1 without taking into consideration other items that affect basis. The officials with LB&I indicated that the most likely target for these letters will be taxpayers who claimed a loss from an S corporation but failed to include the basis schedule in their returns.

It is unclear at this point what these soft letters will say or what the ramifications to taxpayers will be for failing to respond. The LB&I officials indicated that responding to the letters would be voluntary, but they would not reveal what weight, if any, a taxpayer’s failure to respond would have in a determination of whether to pursue an audit.

It is clear that S corporation basis is a current area of focus for the IRS. Taxpayers lacking up to date basis computations should consider consulting their tax advisors even before they receive one of these soft letters.


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