The 7203’s instructions mention that it may be beneficial for all shareholders to complete and retain the form even for years it isn’t required “as this will ensure their bases are consistently maintained year after year,” Powers said. “The theory is that eventually the basis will have to be computed.”
For the moment, an incorrect 7203 probably won’t bring direct consequences if the taxpayer makes a good faith effort to complete the form. “There could be additional tax and penalties if the taxpayer deducts losses or fails to include gains on excess distributions because they’ve incorrectly calculated basis,” Greenwald said.
“If the IRS recomputes basis for your company, that could alter possible tax liabilities if your business sustained losses or if you sold your company,” Schuster added.
Failure to include a required 7203 might also be a red flag increasing the chance the shareholder’s personal return could be selected for IRS exam, Powers said.
“Computation of shareholder tax basis, particularly if it wasn’t adequately maintained in prior years, can be complex and time-consuming,” he added. “Start working on Form 7203 now, even if the shareholder’s personal tax return is on extension and may not be filed until October.”