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U.S. Treasury Auditors call single-owner S corporations "a multibillion dollar employment tax shelter for single-owner businesses"
The Deputy Inspector General for Audit published a memo in May 2005 calling the single-owner S corporation a massive tax-shelter. She proposed that the IRS eliminate the ability of S-corp owners to pay employment taxes on only a portion of their business profits.
Read the Department of the Treasury S corporation audit report.
The report estimates lost tax revenues of $5.7 billion in calendar year 2000, and proposed that single-owner S corporation shareholders pay employment taxes on their business profits, instead of on salary received.
The audit uncovered 36,000 owners of single-shareholder S corporations with profits of $100,000 or more, who paid $0 employment taxes, i.e., received no salary despite profits of $100,000 or more.
The inspector's report estimates that if all single-owner S corporation profits were subject to employment taxes, the additional tax revenues would be $61 billion over five years from 2006 to 2010.
Given the size of the budget deficit, this measure has a good chance of enactment. At that time, one of the major benefits of the S corporation structure would be lost.
