IRS Will Begin Sending Notices to S Corp Shareholders Who Don’t Report Basis
In follow up to our previous blog post about The Problem of S Corp Shareholder Basis, we received confirmation this week that the IRS intends to begin sending notices to S corporation shareholders that have not attached basis schedules to their 2018 tax returns.
A draft of the form letter was recently published on the IRS website indicating that shareholders will likely begin receiving notices in the mail shortly.
The New Requirement
When the IRS released the Form 1040 for 2018, there was a change to the second page of the Schedule E where income from S Corporations is reported. The IRS added a new column where you check a box if a basis computation is required. Per the form instructions, if an individual reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from an S Corporation, they must check the new box and attach a copy of their stock basis computation.
Early indications are that there has been a high rate of non-compliance with this new requirement, but the fact that the IRS has moved so quickly to sending notices for this has us concerned.
Who is Responsible?
Maintaining accurate basis records is a challenge particularly in cases where shares are gifted to family members or inherited upon death. Calculating accurate basis records often means going back decades to when the shares were originally purchased or inherited and sorting through more than fifteen years of K-1s in order to comply.
We currently believe that tracking basis is the shareholder’s responsibility not the corporations. Shareholder basis is an individual calculation and is separate from the accumulated adjustments accounts (AAA), which is maintained at the corporate level.
Looking Forward
Going forward, there is some concern that shareholder basis may become a corporate level responsibility. Partnerships, for instance, are required to track the basis of all partners and report that basis directly on partner K-1s. Banks should consider this future possibility and assess their options going forward.
Some institutions, particularly those that are more closely held, may want to begin the process of maintaining shareholder basis if those records are not already maintained. In the meantime, other institutions can assist their shareholders by providing copies of prior year K-1s, information on stock purchases and sales, and other records.
CLA is here to help. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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