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Your Best Strategy for Surviving an IRS Reasonable Compensation Challenge

By Paul S. Hamann

There are two ways to survive an IRS Reasonable Compensation challenge.  The first is a proactive strategy, getting all your clients ducks in a row ahead of time so you are prepared if the Reasonable Compensation figure is challenged.   The second is a desperate last-minute struggle to defend a Reasonable Compensation figure that may not have any basis in reality.

Why there is no right answer for Reasonable Compensation – but there are wrong ones

By Paul S. Hamann

The wrong answer goes something like this:  I guessed; I split my distribution 50/50, or any other answer that involves a WAG.  In other words, any answer that does not have supporting information will probably have little creditability with the IRS.  So if there are wrong answers how come there aren’t right answers?  The easiest way to think about this puzzle is to stop thinking “I need a right answer” and start thinking “I need a credible answer.”

How Much am I worth? It depends who’s asking…

By Paul S. Hamann

What am I worth is an interesting question because it largely depends on who’s asking and why?  An insurance advisor is considering your future.  A headhunter is examining your track record and potential.  A mineralogist would be assessing the value of your trace elements (about $160 for the average person).  But what we are concerned with is if the IRS asks…

Short & Sweet this Month

By Paul S. Hamann

A big thank you to all of our users!  Thanks for making RCReports the go-to solution for CPA’s and Financial Advisors when Reasonable Compensation is on the line.  We know you are in the depths of tax season so we are keeping this month’s newsletter short – see below for the sweet.

The Year in Review & The Year Ahead

By Paul S. Hamann

The Year In Review: 2013 brought us some great insight into the field of Reasonable Compensation by way of the McAlary case.

Compensation Agreements – McAlary had a Compensation Agreement, but the courts didn’t buy it: “We are not persuaded that the remuneration agreement represents a sound measure of the value of the services that Mr. McAlary provided to petitioner during 2006. We cast a sceptical eye on the agreement inasmuch as Mr. McAlary sat on both sides of the table when the agreement was executed, occupying the positions of both employer and employee. The agreement clearly was not the product of an arms-length negotiation.”

Reasonable Compensation Winning and Losing Year-End Strategies

By Paul S. Hamann

It is important to talk with your S Corp clients now about their Reasonable Compensation.  Most S Corps, whose fiscal year matches the calendar year, must have their payroll completed before year-end.  Waiting until next year to address this issue with your clients could cost them big.

Reasonable Compensation Then & Now

By Paul S. Hamann

It doesn’t seem that long ago that the best advice for determining reasonable compensation was a rule of thumb or safe harbor figure; boy, have things changed.  Beginning in 2005 the IRS launched a study of S Corp compliance.  Since launching this study the IRS has:

McAlary v. IRS

By Paul S. Hamann

“Another one bites the dust.”  Just a line that popped into my head when I read the recent Reasonable Compensation (RC) case: Sean McAlary Ltd, Inc. v. Commissioner.  McAlary Ltd. joins a long list of S Corps that have lost their RC challenges in court, about 25 in all.  The McAlary case is not that different from the other cases but it does provide some great insights into how the IRS determines RC and how the court weights the various aspects of the IRS’s determination.

Don’t Take My Word For It…

By Paul S. Hamann

Mid-summer is a good time to take a break and share what others are saying about Reasonable Compensation.  This month I have assembled some of the most recent and poignant reports on Reasonable Compensation for Shareholder-Employees of S Corps from some big name publications, your peers and our government – Enjoy…

What about Bob?

By Paul S. Hamann

In the 1991 movie What about Bob, Bob Wiley (played by Bill Murray) asks Dr. Leo Marvin (played by Richard Dreyfuss) how best to conquer his phobias.  Dreyfuss deadpans, “Baby steps.”

I often think about this movie when I am asked by CPA’s and financial advisors about the best way to get their clients to comply with IRS guidelines on Reasonable Compensation for S Corps – My answer is the same as Richard Dreyfuss – “Baby Steps”. Start by sending them an Issue Letter on the subject; we provide our users with an issue letter that you can download and customize to fit your firm’s personality.  You may be surprised how many of your clients will be happy to comply, once they understand the issue and its tax implications and consequences.

Brussels Sprouts V. Reasonable Compensation

By Paul S. Hamann

Trying to get your S Corp clients to determine their reasonable compensation is a lot like trying to get a child to eat Brussels sprouts.  You can try to convince them that Brussels sprouts are good for you, while that pile of Brussels sprouts sits there just getting ever colder and even less appetizing.  But if you really want them eaten, you must put your foot down and require that the little green nemesis be eaten.

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