Three steps to Reasonable Compensation compliance for all of your S Corps

three steps to reasonable compensation compliance for all of your - s-corps

“The only reason for time is so that everything doesn’t happen at once.” Albert Einstein

Use time to your advantage! Here’s how one RCReports subscriber brought every S Corp he worked with into Reasonable Compensation compliance in three easy steps. (Full disclosure: The steps below assume you have an RCReports account.)

Step One – Year One:

  • Determine Reasonable Compensation for all new clients as part of their intake and setup. This information helps determine the best choice of entity and begins discussion on retirement, exit, and estate planning, plus other services you may provide.
  • Send out an Issue Letter (free to all RCReports account holders) to all current S Corp clients, urging them to have their Reasonable Compensation researched and documented by your firm.
  • All those who take you up on your advice, you can scratch off your list. These are your Group A clients.

Step Two – Year Two:

  • Focus your attention on those who didn’t take your advice. These are your Group B clients.
  • Remind Group B clients early in the year about the importance of having their Reasonable Compensation researched and documented by your firm.
  • Make research and documentation a requirement: If they don’t have your firm complete a Reasonable Compensation report on them, they will need to provide reliable research and documentation of their own to support their Reasonable Compensation figure. Inform them that guessing will no longer be acceptable.

Step Three – Year Three:

  • Lay down the law. In spite of all your efforts in Year Two, chances are you will still have a handful of clients who have not complied. These are your Group C clients.
  • Warn Group C clients that you will no longer be completing their tax returns. Explain that the risk of a Reasonable Compensation challenge and IRS preparer penalties is too high for you to continue signing off on their tax returns. Wish them well.
  • Congratulate the stragglers who fall in line (better late than never!) Those who don’t most likely cause you the most stress on other issues too. Time to let someone else suffer the headache.

Following this simple three-step – three-year plan should bring all of your S Corp clients into compliance, reducing the risk of a Reasonable Compensation challenge and tax preparer penalties.


Following these three easy steps should also dramatically increase your revenue stream. Talking with your clients about Reasonable Compensation, and thus, all the hats they wear for their business, is a natural way to learn more ways you can help them grow their businesses. This simple conversation leads to opportunities to educate your clients with services they didn’t know existed, needed, or that you provided. These conversations enhance your ability to become a trusted advisor, the person your clients turn to first – because you know them best.

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