IRS Reviewing Personal Service Corporation Tax Computations
NOTE: This headliner is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Headliner Volume 97
August 12, 2004
The Internal Revenue Service recently began contacting corporations that do not appear to have used the applicable personal service corporation tax rate in computing their 2002 and 2003 tax liability. The taxable income of "qualified personal service corporations" is subject to a flat tax rate of 35 percent instead of the graduated rates available to most corporations.
A corporation is a qualified personal service corporation if it meets both of the following tests:
1. Substantially all of the corporationâ€™s activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
2. At least 95 percent of the corporationâ€™s stock is owned by employees performing services for the corporation, retired employees, the estates of employees, or other persons acquiring stock in the corporation by reason of the death of employees.
Personal service corporations that receive a letter and Revenue Agent Report will have 30 days to either agree or disagree with the proposed tax increase. The tax increase will be the difference between the flat 35 percent rate and the tax shown on the original return.
Taxpayers who do not agree may appeal the determination by providing a written statement that they do not agree, the reasons for disagreement, and the law or other authority that supports their position. Detailed guidance on the examination process and appeal rights is included with the letter.
For additional information on personal service corporations and corporate tax rates, refer to the following sources:
* Instructions for Form 1120, U.S. Corporation Income Tax Return
* Publication 542, Corporations