Thank you to Starting Lineup member RCReports for this key update as we head into tax season!
In light of recent events surrounding the IRA22 funding, I wanted to provide some additional detail on why it is absolutely crucial that you are working with each of your S-Corp owners to determine their reasonable compensation in an accurate and defensible manner.
In a Forbes article, dated January 10, 2023, it reads:
Hiring more [IRS Revenue Agents] may allow the IRS to increase audits (which are at an all-time low) but those audits would likely be focused on higher-income pass-through entities (or PTEs). Many PTEs have been skirting tax regulations concerning deductibility of losses (partnerships and S-corporations) and reasonable compensation for officers (S-corporations) for years and many in the tax industry think that additional scrutiny is long overdue.
This echoes the letter from U.S. Secretary of the Treasury Janet L. Yellen sent to the Commissioner of the IRS in August 2022:
“Enforcement resources will focus on high-end noncompliance. There, sustained, multi-year funding is so critical to the agency’s ability to make the investments needed to pursue a robust attack on the tax gap by targeting crucial challenges, like large corporations, high-net-worth individuals and complex pass-throughs, where today the IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns received.”
The takeaway is clear – the IRS intends to audit S-corporations at a much higher rate in the near future, specifically focusing on reasonable compensation.
To protect your clients and yourself, take the following actions when determining reasonable compensation for your S-Corp owners:
The penalties for taking low, or no, reasonable compensation are steep for both the S-Corp owner and the practitioner. You can’t afford to skimp when it comes to calculating reasonable compensation, so take steps now to ensure you’re getting it right this tax season.
RCReports was built using the IRS approved methods, IRS job aids, court rulings, geographic data, and a proprietary database of independent wage data to accurately and objectively determine Reasonable Compensation in minutes that provides a defensible position in audit or litigation.
If you work with S-Corps, this is one piece of tech you can’t live without this tax season.
If you’d like to learn more you can: