Blog
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Unpacking the Increased IRS Enforcement in IRA22 for S Corps
- August 18, 2022
- Posted by: Abbie Deaver
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
The Inflation Reduction Act of 2022 (IRA22) was signed into law on August 16, 2022. The goal of the package is to raise $737 billion in revenue over the next decade, with $127 billion of that revenue coming from increased IRS enforcement. While it will take time before we understand the full implications of the bill, there are steps you can take now to ensure you and your clients are protected when the IRS ramps up examinations.
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IRS Tech Targets S Corp Officer Compensation
- August 1, 2022
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
The IRS is deploying technology and big data to combat compensation under-reporting. What does this likely mean for you and your S Corps? That Reasonable Compensation challenges will likely occur outside the traditional exam process. A challenge may come from the ongoing Employment Tax Program or the recently launched CIP.
From our polling, we find most tax advisors and their S Corp clients are dangerously unprepared for an IRS reasonable compensation challenge. If you are working with S corps, here’s the news you need to know: (more…)
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Is the IRS Job Aid on Reasonable Compensation Still Relevant?
- July 1, 2022
- Posted by: Paul Hamann
- Category: Blog
By Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court
Our guest contributor this month is Michael Gregory. Former IRS Territory Manager and key architect of the IRS Job Aid on Reasonable Compensation shares his wisdom on how the Job Aid has stood the test of time.
IRS valuers identified reasonable compensation as one of the top issues for audit. Differences of opinion by valuers in the private sector and IRS valuers could lead to conflict and disputes on examination, leading to Appeals, and potentially to litigation. This commentary defines reasonable compensation, introduces the IRS Job Aid and Appendix, provides links to some recent IRS papers related to reasonable compensation, introduces how various levels at the IRS look at the issue, provides links to relevant court cases and key factors for consideration from those court cases, and provides a source for contemporary commentary on this topic.
What is reasonable compensation and how is it determined? (more…)
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Adding Compensation Consulting to Your Practice
- June 1, 2022
- Posted by: Paul Hamann
- Category: Blog
By Stephen D. Kirkland, CPA, CMC, CFF
You know that your clients may be extremely astute when it comes to manufacturing widgets. But managing business operations is a different challenge. The boards and officers of closely held businesses (and nonprofits) often lack the knowledge needed to appropriately set compensation amounts. Yet this is a vitally important part of running a successful operation. The total dollar amounts deployed for compensation are often one of a business’ largest expenses. And pay may be one of the most sensitive issues from the perspective of their employees. (more…)
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What You Need to Win an IRS Reasonable Compensation Challenge
- May 1, 2022
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
This is a true story. Names & identifying details have been changed to protect the innocent.
Nancy had a feeling that $40,500 was a good Reasonable Compensation figure for her as owner of Nancy’s Nail Salon. She didn’t have any facts or data to back it up, but she wasn’t trying to get away with anything either. Her accountant thought it felt right, too. Who would check, anyway? Nancy just wanted to get back to the salon and keep making money. Her accountant jotted down $40,500 and reported that to the IRS.
Turns out Nancy’s feeling was correct.
But being correct didn’t save her from months of stress when the IRS came after her. Being correct didn’t save her from expensive accountant fees. And for months she was distracted from the business she loved. (more…)
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IRS lays out steps to keep Reasonable Comp challenges out of Tax Court
- April 1, 2022
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
In a 2017 memorandum to its examiners and appeals agents, the IRS lays out steps to keep Reasonable Compensation challenges out of Tax Court. Great, you say, nobody wants to go to court!
Not so fast. The option of filing a petition in Tax Court provides taxpayers with time and leverage. By following the steps in this memo, IRS examiners can prevent taxpayers who cannot reach a resolution on Reasonable Compensation from filing a petition in Tax Court. This means:
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- Tax must be paid now. When filing a petition with the Tax Court, taxpayer can avoid paying the tax until the matter is finally resolved.
- Leverage Lost. Filing or even the threat of filing a petition with the Tax Court can give taxpayers and their advocates’ leverage to get the appeals agent to settle the dispute favorably.
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How to Stress Test a Reasonable Compensation Figure
- March 1, 2022
- Posted by: RCR Admin Team
- Category: Blog
Stress testing a reasonable compensation figure is simple. The courts have listed the factors they consider when determining whether a reasonable compensation figure is indeed reasonable. We can use those factors to “stress test” any reasonable compensation figure. (more…)
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What if an S Corp Owner can’t afford to pay Reasonable Compensation?
- February 1, 2022
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
This is by far the number one question we receive, and the answer is both simple and complex. Why? Because the amount of Reasonable Compensation actually paid is tied to distributions, not profit or loss.
Depending on the company’s financial condition and business strategy, a shareholder-employee may be able to take Reasonable Compensation plus a distribution, just Reasonable Compensation, or neither. What the shareholder-employee can’t do is take a distribution instead of Reasonable Compensation.
To help you better understand, let’s run through a few simple scenarios and then move onto some more advanced ones. Keep in mind the following:
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W-2 or 1099 for Shareholder-Employees of S Corps?
- January 1, 2022
- Posted by: RCR Admin Team
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
1099 or W-2? That’s the number one question Jack receives here at RCReports.
Answer: W-2
We hear your argument: Paying wages via 1099-MISC instead of W-2 has no tax effect!
Here’s Jack’s reply: It’s the law.
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How one Reasonable Compensation Report saved a Taxpayer $80,000+
- December 1, 2021
- Posted by: Paul Hamann
- Category: Blog
By Paul S. Hamann & Jack Salewski, CPA, CGMA
Is credible data really that important? Yes. In one recent case, data convinced an IRS Examiner to abandon an unreasonable position, saving the taxpayer thousands of dollars. In the process, the CPA, whose data-less compensation guess attracted the audit in the first place, saw his reputation tarnished. But the reputation of the taxpayer’s data-driven CPA rescuer is looking even brighter. (more…)
