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Focus on Finances

S corps are coming under closer scrutiny. How will it affect you?

This story appears in the January 2006 issue of Entrepreneur. Subscribe »

Concerned that some owners of S corporations aren't paying their fair share of business taxes, the IRS has kicked off an aggressive campaign to identify potential abuses among S corps.

The IRS has recently started to examine 5,000 randomly selected S corp returns from the 2003 and 2004 tax years. A chief concern: whether some S corp owners are skimping on their salaries--or skipping them altogether--in favor of a larger dividend distribution, which isn't subject to self-employment taxes. "Historically, that's what people have tried to do, and that's one of the reasons the IRS is conducting these audits," says Deborah Schenk, Grossman Professor of Taxation at the New York University School of Law.

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