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Is the IRS Job Aid on Reasonable Compensation Still Relevant?
- July 1, 2022
- Posted by: Paul Hamann
- Category: Blog
Views: 667By 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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What You Need to Win an IRS Reasonable Compensation Challenge
- May 1, 2022
- Posted by: Paul Hamann
- Category: Blog
Views: 3,616By 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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How one Reasonable Compensation Report saved a Taxpayer $80,000+
- December 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 2,552By 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…)
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77% of Accountants Misinformed on Reasonable Compensation
- November 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 1,579By Paul S. Hamann & Jack Salewski, CPA, CGMA
The most popular methods for computing reasonable compensation are, like the cool kids in high school, cute and fun to hang around with, but not who you need at your side come finals week. Conventional Wisdom, Rule of Thumb, and Safe Harbor methodologies win the popularity contest among accountants, but all three get an “F” in front of tax court judges.
We recently polled 4,541 CPAs, EA’s, and other tax professionals. Here’s what we asked: Which of the following methods of determining reasonable compensation are recognized by the IRS? (more…)
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BLOSSOM DAY CARE v. IRS Tests 20-Year-Old Precedent
- September 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 3,698By Paul S. Hamann & Jack Salewski, CPA, CGMA
“Too clever is dumb” quipped the humorous poet Ogden Nash. He wasn’t wrong. A couple of named Hacker found that out the hard way, and by that we mean the expensive way.
It has been about seven or eight years since we last had an S Corp Reasonable Compensation challenge come out of the tax courts. In the author’s humble opinion, that’s because there is very little left for taxpayers to test out in court. Most issues have already come up. Precedents have been established.
That didn’t stop the owners of Blossom Day Care (Barry Hacker and Celeste Hacker – The Hackers) from spending a decade and (likely) tens of thousands of dollars trying to subvert Revenue Ruling 74-44 and a 20-year-old plus precedent that classifies corporate officers as employees. (more…)
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Fact or Fiction – How are you advising your clients?
- August 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 705By Paul S. Hamann & Jack Salewski, CPA, CGMA
We recently polled 993 CPAs, EA’s, and other tax professionals to find out if they could recognize fact from fiction as it applies to the IRS’s guidance on how to determine reasonable compensation. 81% believed the fiction.
Here’s what we asked: Which of the following methods of determining reasonable compensation are recognized by the IRS?
A. Industry Rule (Set wages as a percentage of sales or revenue based on industry standards)
B. 50/50 Rule (50% distribution – 50% Wages)
C. Safe Harbor Rule (Set wages at the S.S. Max)
D. All the above
E. None of the above
81% selected A, B, C, or D – all of which are myths. Congratulations to the 19% who got it right.
So, what gives? Why do so many accountants believe these myths are “rules”? (more…)
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Don’t Get Ambushed: The IRS Is Arming and So Should You
- July 1, 2021
- Posted by: Paul Hamann
- Category: Blog
Views: 2,263By Paul S. Hamann & Jack Salewski, CPA, CGMA
For two decades the IRS has been preparing an assault on reasonable compensation for S Corporations. Their arsenal is now fully stocked. In it, there’s everything from commonsense tools to obscure memos. Get ready. Arm yourself with facts and data, because fiction and myths aren’t going to protect you.
COVID gave S Corps a short cease-fire. By 2019 examiners had been trained to address the long-standing concern over inadequate reasonable compensation and bring S Corp. owners into compliance. Audits picked up. A look at this new initiative was to follow in 2020 with a TIGTA report, then COVID hit. Last year saw little activity and the TIGTA report was never produced.
So, will the IRS resume its assault on S Corps and owners’ compensation in 2021? We consulted our magic eight ball for the answer, but it was little help [Ask Again Later]. Our best advice is to get ready, because even if the IRS doesn’t show up in 2021, they are still likely to show up soon, locked and loaded. (more…)
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10 Reasonable Comp Points to Cover with Your Clients this December
- December 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 974By Paul S. Hamann & Jack Salewski, CPA, CGMA
Without an accurate Reasonable Compensation figure, tax planning is just a guess. (more…)
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Anatomy of an IRS Reasonable Compensation Challenge
- June 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 1,918By Jack Salewski, CPA, CGMA & Michael E. Breslin CPA, MST, JD
What does an IRS reasonable compensation challenge look like from A-Z? Following is an analysis of a recent reasonable compensation challenge for a real estate agent in the Northeast handled by tax attorney Mike Breslin:
An S Corp owner has a fantastic year. More zeros than he’s ever seen. Then comes “The Letter” from the IRS.
That’s what happened to tax attorney Mike Breslin’s client. A real estate agent had a banner year, primarily because of one huge sale, more than doubling his usual income. But, like every other year in his career, he claimed no reasonable compensation on his S Corp tax return. (more…)
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Reasonable Compensation & the Single Shareholder S Corp
- April 1, 2020
- Posted by: Paul Hamann
- Category: Blog
Views: 3,232By Jack Salewski, CPA, CGMA & Paul S. Hamann
“If there is only one shareholder and no other employees, should all distributions be taken out as Reasonable Compensation?”
This is a common question we receive at RCReports and like with most of the questions we receive, the answer is: “Maybe.” (more…)