The corporate and shareholder income tax returns are considered related because the returns are for entities over which the shareholder has control, and which can be manipulated to divert funds or camouflage transactions. Therefore, the examination of the corporation cannot be completed without also examining the shareholder’s individual return.
For Example, A closely held corporation was examined. The 100% shareholder’s personal expenses were deducted as a business expense on the corporate return. The shareholder’s personal return will also have to be examined to make the adjustment for the unreported dividend. A reasonable likelihood of unreported income on the shareholder’s return exists because the shareholder has manipulated the corporate entity and camouflaged nondeductible personal expenses as deductible business expenses. The examiner is further encouraged to go beyond the minimum income probes for this related shareholder, since there is a reasonable likelihood of unreported income on the individual return.