S-Corp Audit Risks: Compensation, Basis and Records
By AE Tax Advisors ยท Published 2026-07-05
Updated November 8, 2026.
No salary percentage, expense ratio or return presentation guarantees that an S corporation will avoid an IRS examination. The IRS describes several selection methods, including statistical screening and related examinations. Its public guidance does not establish the specific score thresholds sometimes repeated in marketing articles.
Review reasonable compensation
A working shareholder's wages should be supported by the services performed and relevant compensation facts. A fixed split between wages and distributions is not a universal safe harbor. Review duties, time, experience, other workers and the sources of the corporation's receipts.
A low salary can create a substantive payroll issue, but a website cannot reliably predict that one income-and-wage combination will automatically trigger an audit.
Reconcile shareholder basis and distributions
Keep stock and qualifying debt basis schedules, contributions, loans and distribution records. Corporate debt and an unpaid guarantee do not automatically establish shareholder debt basis. A loss on the K-1 can be limited before it reaches the individual return.
Use the basis guide to separate loss limitations from distribution treatment.
Substantiate business expenses and reimbursements
Personal expenses do not become business deductions when paid from a corporate account. Maintain receipts and business-purpose records, distinguish capital assets from current expenses, and apply meal, travel, vehicle and benefit rules correctly.
Accountable-plan reimbursements require business connection, substantiation and return of excess amounts. More-than-2% shareholder benefits can have different wage treatment from benefits for other employees.
Reconcile returns and source documents
Compare books, bank activity, payroll filings, information returns and shareholder K-1s. A mismatch or error should be investigated even when it does not lead to an examination. Keep evidence of elections and the IRS's acceptance where applicable.
A compliance review should address actual errors and documentation gaps rather than changing valid numbers to fit an assumed statistical norm.
If the IRS contacts you
Verify the notice and the tax period, preserve records, calendar the response deadline and identify the professional authorized to respond. An inquiry is not proof that a return is wrong. The IRS generally initiates an audit through mail, not an unsolicited request for payment by email or text.
Request a return and records review if you need to reconcile these issues. The objective is accurate filing and a supportable record, not a promise to eliminate examination risk.
Frequently Asked Questions
Is a 60/40 salary split a safe harbor?
No. Reasonable compensation depends on actual services and other facts.
Can a website predict my IRS audit score?
Public guidance does not provide the exact thresholds needed to make that claim.
Does receiving an IRS letter mean I owe more tax?
Not necessarily. Identify the notice, issue and required response before drawing that conclusion.
Sources and update notes
Source references and the changes described in this guide were checked November 8, 2026. Published by AE Tax Advisors; see our editorial policy. Examples are illustrative and require review of your records before filing.