If you’re filing as an S Corporation, you’re playing by a unique set of IRS rules—and the IRS is paying close attention. Knowing what the IRS looks for in an S Corp tax return can help you avoid costly penalties, audits, or worse.
Let’s break down the key areas the IRS scrutinizes—and what you can do to stay in the clear.
Are You Paying Yourself Correctly According To The S Corp Tax Return?
The IRS S Corp tax return analysis often starts with your officer compensation. As an S Corp owner, you’re both an employee and a shareholder. That means you can’t take all income as distributions—you’re required to pay yourself a reasonable salary.
What the IRS checks:
- Are you reporting officer wages on Form 1120-S, line 7?
- Does the salary match the level of work performed?
- Are you paying payroll taxes appropriately?
If your salary is suspiciously low and distributions are high, you’re waving a red flag the IRS won’t ignore.
Shareholder Distributions: Too Much, Too Soon?
S Corp distributions are not subject to self-employment tax—but the IRS keeps a close eye to ensure these are only issued after a reasonable salary is paid.
Audit trigger:
- Taking large distributions without reporting proper payroll
- Inconsistent or undocumented draws
The IRS S Corp tax return review will look for signs you’re dodging payroll taxes through unbalanced compensation strategies.
Loan Reporting & Shareholder Basis: Are You Tracking Properly?
Did you loan money to the business or take a loan from it? The IRS wants those details to be accurate and well-documented.
Key review areas:
- Are shareholder loans reported correctly on Schedule L?
- Is there a formal promissory note?
- Can you show basis to claim deductions or losses?
Failing to report loans or basis correctly can lead to disallowed deductions and a spike in your tax bill.
Deductions: Are They Legit—and Documented?
S Corps often take deductions for home office use, vehicle expenses, meals, and travel—but the IRS wants proof.
They’ll review:
- Mileage logs and receipts
- Business purpose for each expense
- Whether any personal expenses were mixed in
Poor bookkeeping or vague records are red flags that your IRS S Corp tax return may not be audit-safe.
Late or Incomplete Filings: Are You Playing by the Rules?
Late filings for Form 1120-S come with automatic penalties, and missing schedules or disclosures can lead to bigger problems.
Watch out for:
- Incomplete K-1s for shareholders
- Missing elections (like Form 2553)
- Failure to disclose foreign assets or income
The IRS system flags these issues quickly, so don’t give them a reason to look closer.
Compliance On Your S Corp Tax Return Now Saves You Later
What the IRS looks for in an S Corp tax return isn’t a mystery—but it does require discipline. Clean books, reasonable compensation, and documented deductions can keep you compliant and lower your risk of audit.
If you’re unsure whether your return would stand up to scrutiny, now’s the time to act—not after the IRS sends a letter.
Ready for a Second Set of Eyes on Your S Corp Tax Return?
If you want to make sure your tax return won’t attract the wrong kind of attention, we can help. Schedule a consultation and get proactive about your compliance before the IRS gets involved.
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