By Paul S. Hamann & Jack Salewski, CPA, CGMA
We have asked over 20,000 accounting professionals “What is your biggest concern or aggravation when advising your clients on Reasonable Compensation?” The number one response by far: Educating my clients 59%. Followed by Finding Reliable Comparability Data 26% and Accuracy 15%.
The RCR Resource Library includes Tools designed to help you educate your clients, including:
Armed with these tools, practitioners can efficiently educate their clients and simultaneously reduce risk of preparer penalties plus build an additional revenue source.
We recently updated our most effective issue letter, based on feedback from a long-time RCReports user:
“Hi Paul, The light went on after receiving an email from you. This year I finally talked with my clients and said FRANKLY: “I am glad you’re my client and I will never let you pay one penny more than is required. But if we don’t have a sound basis for your Reasonable Comp, you are going to have to find another CPA.”
It worked! I fired 2 clients who were screamers and the others have gratefully agreed.
Your software platform is perfect for my clients. We can easily navigate the system and confidently arrive at a Reasonable Comp number that I can defend.” ~ Robert F.
Please feel free to copy and modify the Issue Letter below to suit your needs:
Issue LetterMr. Tom Jones111 First StreetAnytown, CO 88888
As your tax advisor, I need to alert you to new risks related to the accuracy of your Reasonable Compensation figure. (Reasonable Compensation is the salary or wage that you, a shareholder-employee of an S Corp, must pay yourself for the work you perform for your company.)
The Qualified Business Income (QBI) deduction (created with the passage of the TCJA) is tied to Reasonable Compensation and creates new risks (think tax, penalty and interest), if successfully challenged by the IRS.
Therefore, it is more important than ever that we have credible documentation to back up your Reasonable Compensation figure. The IRS criteria and guidelines state that “companies have the burden of showing compensation is reasonable”. To accomplish this and to avoid the 20% accuracy penalty the IRS states that:
- The dollar amounts must be verifiable.
- The taxpayer must be able to demonstrate the origin of the amount claimed.
- The taxpayer must be able to show that he entered the amount in good faith.
We have tools, available for you, that meet the above requirements and mitigate the risks associated with an IRS Reasonable Compensation challenge. Please contact me if you would like to discuss this issue further and/or to have (firm name) complete a Reasonable Compensation analysis with your input.
A Reasonable Compensation analysis is an independent, unbiased report that establishes your Reasonable Compensation, using criteria outlined by the IRS and Courts, and provides a defensible position to an IRS challenge. We typically charge $500 to complete an analysis, however if you have us complete a report before the end of this year, we will decrease our fee to $375.
A Reasonable Compensation challenge can be costly. Typically, taxes, penalty, and interest are more than double the original tax that would have been owed – plus costs for amending returns (all totaled, usually in the tens of thousands of dollars). In addition, the IRS is holding Tax Preparers responsible for unreasonable compensation, assessing preparer penalties of up to $5,000 for signing off on an unreasonably high/low compensation figure.
I appreciate your business and I will work hard to keep you from paying even one penny more than is required, however, if we don’t have a sound basis for your Reasonable Compensation going forward, I won’t be able to represent you in the future.
Please call me at your earliest convenience to take the necessary steps to protect yourself and your company.
Sincerely,(CPA name)(CPA Firm)