Client Portal
Let's Talk

IRS Now Requiring S Corporation Shareholder to Report Basis on Tax Returns

CFO

After the passing of the Tax Cuts and Jobs Act, IRS released the revised Form 1040 – US Individual Income Tax Return earlier this year.  As part of the revision, a new checkbox has now appeared on Schedule E of Form 1040 that applies to S Corporation Shareholders. IRS posted information about this change on its website stating:

As stated in Part II of the Schedule E (Form 1040), a taxpayer who owns an interest in an S corporation and reports a loss, receives a distribution, disposes of stock, or receives a loan repayment from the S corporation must check a corresponding box under line 28, column (e), and attach a computation detailing their S corporation basis. The discussion about basis rules for S corporations in the Instructions for Schedule E (Form 1040) for Parts II and III does not limit or modify this requirement.

Per the instructions, an individual taxpayer who owns an interest in an S Corporation must attach a copy of their stock basis calculation to their return if the individual:

  • reports a loss
  • receives a distribution
  • disposes of stock
  • received a loan repayment from the S Corporation

The requirement to attach a basis schedule to Form 1040 for an S Corporation shareholder claiming a loss is not new. However, the instances where an S Corporation shareholder is required to attach a basis schedule have significantly expended. Since almost all S Corporations make distributions to shareholders, it is anticipated that nearly all S Corporation shareholders are subject to this new provision.

Below is a screenshot of page 2 of Schedule E depicting the new checkbox:

IRS has indicated that it intends to begin sending notices to S Corporation shareholders that have not attached basis schedules to their 2018 returns. A draft of the form letter was recently published on the IRS website.

The Challenge

Calculating the S Corporation shareholder’s basis is important because it measures the amount the shareholder can withdraw or receive from the S Corporation without realizing income or gain. However, maintaining an accurate S Corporation basis is a challenge particularly in cases where shares are gifted to family members, or inherited upon death.

Historically, the task of tracking S Corporation basis has been neglected because when a profitable S Corporation makes distributions which are less than the taxable income of the Corporation, the number simply didn’t matter – until a major change happened i.e. change in shareholder’s ownership or the end of the Company’s life. The new requirement means that S Corporation shareholders and their tax preparers may have to dig through their historic records in order to create the basis schedules, going back the date when the stock was acquired. This could mean going back decades to when the stock was originally acquired (purchased or inherited).

Looking Forward

We strongly feel that maintenance of S Corporation basis schedule is a shareholder level responsibility. However, this is an area where the shareholders may request assistance from the S Corporations. Since the new requirement came out, a number of our S Corporation clients have been contacted by their shareholders who were looking for help in putting together their basis schedules.

S Corporations can assist by providing copies of the following documents to their shareholders:

  • Copies of prior year K-1s
  • Information on prior stock purchases
  • Stock histories
  • Information on direct loans from the shareholders

Some of our S Corporation clients have decided to maintain complete basis schedules for all shareholders with assistance from us. Please feel free to contact us with questions regarding S Corporation shareholder basis calculations and visit our blog to read more articles on related topics.

You’ve heard our thoughts… We’d like to hear yours

Our blog exists to create a dialogue on issues that are important to individuals and businesses. While we enjoy sharing our ideas, we’re especially interested in what you may have to say. If you have a question or a comment about this article, we hope you’ll share it with us. Materials provided are meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary.

DOWNLOAD PDF

Share insights

Email
Facebook
X
LinkedIn

Professional tax return preparation helps reduce filing errors by ensuring that all financial information is accurate, complete, and properly reviewed before submission. Tax professionals check income, deductions, and documents carefully, which reduces mistakes like wrong calculations or missing details.

They also stay updated with tax laws and use the correct forms and filing status. This lowers the risk of penalties, delays, and IRS issues, making the entire tax filing process more accurate and stress-free with Reckenen. 

What is Tax Return Preparation?

Tax return preparation is the process of collecting financial information and filing it with the tax authorities in an accurate and legal way. It includes reporting income, claiming deductions and credits, calculating taxes owed or refunds, and submitting the required forms to the IRS or relevant tax department.

In simple words, tax return preparation means organizing your financial details and filing your taxes correctly so you pay the right amount and avoid penalties or errors. A proper tax due diligence list is often used by professionals to ensure nothing is missed.

Why Tax Filing Errors Matter

Filing taxes may look simple, but even a small mistake can cause serious problems. Errors can lead to penalties, delayed refunds, or even IRS audits. Many people think they can manage it alone, but tax rules are complex and change often.

Most common tax mistakes happen because of missing details or wrong calculations. This is why professional tax return preparation is important. It helps reduce errors, ensures accuracy, and keeps everything compliant with tax laws. 

Why Professional Tax Preparation Matters

Tax filing errors can create serious financial and legal problems. From penalties to audits, the risks are real and often avoidable.

Professional tax return preparation helps ensure accuracy, compliance, and better financial outcomes. It reduces stress, saves time, and protects taxpayers from costly mistakes. A tax expert can help handle complex filings more safely. In today’s complex tax environment, choosing professional support like a tax filing pro, for short, is not just helpful; it is a smart decision. 

Common Tax Filing Errors Taxpayers Make

Many taxpayers make similar mistakes without realizing it. These include reporting incorrect income, missing deductions or credits, making calculation errors, and choosing the wrong filing status. Some people also forget to attach required forms or make simple data entry mistakes while filing manually.

Even one small tax filing error can change the final tax amount and create issues with the IRS. 

Why Errors Happen in Self-Prepared Tax Returns

Self-prepared tax returns often contain mistakes because most people are not fully aware of tax laws. Rules change frequently, and it becomes difficult to keep up with updates.

Another major reason is misunderstanding deductions and credits. Many taxpayers either miss benefits they qualify for or claim them incorrectly. Poor record-keeping throughout the year also leads to confusion during filing. Some people rely too much on software or AI tools, but without proper knowledge, mistakes still happen when users try to get their own tax filing done without support.

How Professional Tax Preparers Reduce Filing Errors

  • Carefully review all financial data to ensure accuracy
  • Check that all documents are complete and correct
  • Verify every number to avoid calculation mistakes
  • Apply updated tax laws and correct deductions
  • Avoid outdated or incorrect filing practices
  • Review the entire return before submission to catch errors
  • Select the correct tax forms and filing status
  • Ensure proper income reporting and classification.

Professionals also follow a structured tax due diligence list to ensure accuracy at every step. 

Role of Due Diligence in Tax Preparation

Due diligence means carefully checking all tax information before filing. It is an important part of professional tax preparation.

Tax experts verify income details, review deductions, and ensure that all claims are accurate. This process reduces the chances of errors and helps maintain compliance with tax regulations. It also lowers the risk of penalties and builds confidence in the final return.

How Professional Tax Preparation Helps Avoid IRS Penalties

IRS penalties usually happen when there are errors in reporting or missing information. Professional tax preparation helps avoid these problems by ensuring everything is correct before submission.

It prevents incorrect deductions, reduces the chances of underreporting income, and ensures that tax returns are filed on time. Proper documentation is also maintained, which is very important in case of an audit. This reduces stress and protects taxpayers from unnecessary financial loss.

Benefits of Using Professional Tax Services

  • Higher accuracy in tax returns, reducing the risk of penalties
  • Saves time by handling complex calculations and paperwork
  • Identifies tax-saving opportunities that are often missed
  • Ensures proper compliance with tax laws
  • Provides peace of mind during tax season

When You Should Not Rely Only on DIY or AI Tools

DIY tools may work for simple tax situations, but they are not always reliable for complex cases. If you have business income, multiple income sources, investments, or rental properties, professional help becomes necessary.

Major financial changes during the year can also make tax filing more complicated. In such cases, relying only on software or AI tools increases the risk of tax filing errors. When accuracy and compliance are important, professional support is the better choice.

Professional vs DIY Tax Filing Comparison

DIY tax filing may seem cost-effective, but it comes with higher risk. Many people miss deductions or make mistakes that cost them more in the long run.

Professional tax preparation, on the other hand, follows a structured process. Experts review every detail and ensure compliance with tax laws. This leads to better accuracy and reduces the chances of audits. In simple terms, DIY saves money upfront, but professional services like a tax filing pro for short save money in the long run. 

FAQs

  1. Why should I use a professional tax preparer?

A professional tax preparer helps ensure your tax return is accurate and complete. They also help you avoid errors, reduce penalties, and find possible tax savings.

  1. What process do professionals use to ensure accuracy?

They review all financial documents, cross-check data, apply updated tax laws, and verify calculations before filing. This step-by-step process reduces mistakes.

  1. What are the cons of using a professional tax preparer?

The main drawback is the cost of the service. However, this cost is often lower than the penalties or losses caused by filing errors.

  1. Are tax preparers responsible for mistakes?

Tax preparers are responsible for the work they do, but the taxpayer is also legally responsible for the final return. That is why choosing a qualified professional is important.

  1. When should I hire a professional tax preparer?

You should consider hiring one if you have complex finances or want to reduce tax filing errors and ensure full compliance. 

File Smart, Stay Safe 

Tax mistakes can cost more than you think, but they are avoidable. Professional tax return preparation brings accuracy, compliance, and peace of mind by catching errors before they become problems. Instead of risking penalties or delays, you get a smooth, reliable filing process. In simple terms, working with a professional is not just about filing taxes; it’s about protecting your money, your time, and your financial future.

Avoid costly mistakes; trust Reckenen to get your taxes right the first time.