South Carolina Department of Revenue Income Tax Audit Protest

The situation

Carolina Business Consulting LLC is an S-Corp in Columbia, SC, a 3-shareholder management consulting firm generating $890,000 in annual revenue. In April 2026 SCDOR issued a Proposed Assessment of $18,700 + $1,870 penalty + $1,340 interest = $21,910 after auditing the 2022 SC S-Corp return. SCDOR's adjustments: (1) $14,200 in "shareholder loan repayments" reclassified as S-Corp distributions (reducing each shareholder's basis); (2) $4,500 in home office deductions disallowed for one shareholder who worked remotely.

What the shareholders don't know: (1) The S-Corp basis limitation issue requires analysis of each shareholder's beginning basis, capital contributions, and their share of income/loss. If the shareholders have sufficient stock basis (from capital contributions or undistributed S-Corp income over multiple years), the loan reclassification may not change their income, or may be addressed by documenting that the payments were genuine loan repayments with signed promissory notes and interest payments. (2) SC conforms to federal home office rules (IRC § 280A), if the shareholder meets the federal "exclusive and regular use" test and uses the home office as their principal place of business for the S-Corp's operations, the deduction is valid.

Who receives this

South Carolina S-Corp shareholders, small business owners, and individual taxpayers receiving SCDOR income tax Proposed Assessments after audits. Primary segment: S-Corp and partnership shareholders with S-Corp basis limitation and shareholder loan classification disputes.

Why the agency will not advise you

SCDOR cannot advise taxpayers on contesting its own assessments. MyDORWAY allows protest filing but provides no guidance on what to argue. The 90-day protest window + 30-day conference election creates a two-stage process requiring immediate action. No self-serve SC DOR protest navigator found.

Key facts, with sources

• South Carolina imposes individual income tax at a flat rate of 6.5% (effective 2024, reduced from the previous graduated rate structure under Act 532 of 2022) and corporate income tax at 5%. SCDOR audits income tax returns and issues Proposed Assessments. Under SC Revenue Procedure #92-1, a taxpayer has 90 days from the date of the Proposed Assessment to file a written protest with SCDOR via Form C-245, which can be filed online through MyDORWAY (SC's online tax portal). SCDOR's audit division reviews the protest; within approximately 4–6 months SCDOR issues an Acknowledgement Letter, giving the taxpayer 30 days to request a conference with the SCDOR representative who issued the assessment. After the conference (or if the taxpayer waives the conference), SCDOR issues a Department Determination. The taxpayer then has 30 days to file a 'contested case' petition with the South Carolina Administrative Law Court (ALC), which is an independent administrative court entirely separate from SCDOR. ALC ALJs conduct evidentiary hearings; ALC decisions can be appealed to the SC Court of Appeals and SC Supreme Court. Burr & Forman LLP reports that SCDOR audit appeals process frequently involves passive activity loss disputes, S-Corp basis limitations, and nexus questions for out-of-state businesses with SC economic presence. Source: Appeals Process — South Carolina Department of Revenue · South Carolina Department of Revenue Audit Appeals — Burr & Forman LLP · SCDOR Issues New Guidance on South Carolina Tax Appeal Procedures — Burr & Forman LLP

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. Appeals Process — South Carolina Department of Revenue
2. South Carolina Department of Revenue Audit Appeals — Burr & Forman LLP
3. SCDOR Issues New Guidance on South Carolina Tax Appeal Procedures — Burr & Forman LLP