Too Stiff an Arm?

Technical topics regarding tax preparation.
#1
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I have an s corporation client - the type that always wants to be aggressive - and he often insinuates that I don't do enough to save him on his taxes.

I very politely recommended that he goes to a certified tax planner, or the like if he is not satisfied with my style of tax preparation and planning.

His business nets about a million dollars, and his wife makes about 0.5 million as well.

His latest idea and email request now is to pay himself either a very tiny salary OR an extremely large salary in order to manipulate/optimize his net investment income taxes and his additional Medicare taxes.

My answer would usually be:

"Your pay as an employee of your s corporation should reflect the value and quantity of your services to the business - not an optimized amount to create an improved net investment tax or additional Medicare tax situation."

Anytime now we will be facing the last straw between us, which is fine, but I want to bounce this off of the members here to make sure that my answer is not off base.

What would you do?
 

#2
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I would start with sharing that there are many court cases illustrating the risk of paying too little and paying too much.
That said, I, generally, don't have much issue with someone paying more than "market" because we can usually justify the increase (assumed risk, catch up from prior years, extra time spent, innovative approach, etc.). Paying too little doesn't fly with me and the inconsistency of going back and forth is a risky strategy.
That said, there aren't preparer penalties related to reasonable compensation or lack thereof. If a client is willing to provide justification for such an approach (that isn't "stinky"), I'd probably roll with it and maintain their documentation and my objections, if any, in my file.
~Captcook
 

#3
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CaptCook wrote:there aren't preparer penalties related to reasonable compensation or lack thereof
Other than the $5,000 preparer penalty, but if you bill them enough, that's not worth worrying about. Bill an extra $6-7K each year and you'll come out way ahead. It's not like you'll get caught every year.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#4
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What, exactly, would generate the $5K preparer penalty for reporting only that compensation actually paid?
~Captcook
 

#5
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ItDepends wrote:What would you do?


I would examine how sensitive a client this is.

e.g.

--What percentage of your total revenue does this client and his affiliated entities make up?
--Then first step plus other clients and "external partners" who may be influenced by this client. i.e. clients that referred him and/or he referred and/or is connected with. Financial planners and attorneys that provide you with referrals that he is close with...etc
--Future potential. Both for the client and referrals.

The above analysis would dictate how patient I would be in conveying understanding and education, and how willing I would be just to cut the tuna free and get back to good mana.
 

#6
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CaptCook wrote:What, exactly, would generate the $5K preparer penalty for reporting only that compensation actually paid?
https://www.law.cornell.edu/cfr/text/26/1.6694-1
"The section 6694(b) penalty is imposed in an amount equal to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the tax return preparer for an understatement of liability with respect to tax that is due to a willful attempt to understate tax liability or that is due to reckless or intentional disregard of rules or regulations."

Yeah, probably nothing. Especially since the irs did lose that one case where the preparer appealed the 5K penalty for unreasonable compensation. In a weird coincidence, all of that preparer's S-corp clients were audited, his firm went bankrupt and is out of business.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#7
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Interesting you took my post to suggest any position that would be as egregious as the example you share.
Regardless, in the many reasonable comp cases I've read,a preparer penalty has not been proposed.
~Captcook
 

#8
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I didn't take your post to suggest anything. You stated there are no preparer penalties for unreasonable compensation. That's false. And since it's false, saying something is risky then following it with, "there aren't preparer penalties" as if that means the preparer doesn't need to worry about it is really bad advice.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#9
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SlipperyPencil wrote:[S]aying something is risky then following it with, "there aren't preparer penalties" as if that means the preparer doesn't need to worry about it is really bad advice.


I don't think what I provided was bad advice at all. Preparing a return that fits with what I suggested as an appropriate approach would not generate a preparer penalty. OP was ready to fire a client over an aggressive stance related to reasonable comp. Adhering to the approach I suggested would not generate a preparer penalty. Preparer penalties should not be "driving the bus" in this instance.
~Captcook
 

#10
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ItDepends wrote:I have an s corporation client - the type that always wants to be aggressive - and he often insinuates that I don't do enough to save him on his taxes.

I very politely recommended that he goes to a certified tax planner, or the like if he is not satisfied with my style of tax preparation and planning.

His business nets about a million dollars, and his wife makes about 0.5 million as well.

His latest idea and email request now is to pay himself either a very tiny salary OR an extremely large salary in order to manipulate/optimize his net investment income taxes and his additional Medicare taxes.

My answer would usually be:

"Your pay as an employee of your s corporation should reflect the value and quantity of your services to the business - not an optimized amount to create an improved net investment tax or additional Medicare tax situation."

Anytime now we will be facing the last straw between us, which is fine, but I want to bounce this off of the members here to make sure that my answer is not off base.

What would you do?


What is it he wants you to do??? What is he actually trying to imply?

One of my favorite "lines" is , Pay me 100K and deduct it as professional fees.
That will lower your tax liability by about 40K. :D
 

#11
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He wants me to give him the green light to manipulate his salary based on things in which, in my opinion, he is not supposed to base them (Net Investment Tax and Additional Medicare Tax). He is asking via email - so my answer will be in writing.

I hear and see what other professionals do and I worry sometimes that my advice is too strict.

I'm not so worried about losing the client, as he is always asking or even pushing for me to do things like this, and fortunately, I'm in a position to where I have no need to keep him whatsoever.

My answer is:

It's a bit complicated, so don't hold me to this, but NIIT is generally not imposed on s corporation proceeds for restaurant operations. But s corp proceeds, including yours, may be subject to NIIT for other activity and capital gains on your shares themselves.

I suggest that you pay yourself a salary as is reasonable for the services and labor that you provide for your s corporation independent of it's impact on your taxes.


I wanted to see if others disagree with my answer or think I'm too conservative.
 

#12
sjrcpa  
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What do you mean by
ItDepends wrote:s corporation proceeds
?
 

#13
dave829  
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ItDepends wrote:I suggest that you pay yourself a salary as is reasonable for the services and labor that you provide for your s corporation independent of it's impact on your taxes.

Reasonable compensation isn't just based on the services and labor provided. There can be bonuses paid to key employees of a successful business, including the owner. There are other factors to consider as well, and you will find them listed in any of the reasonable compensation cases involving S corporations.

I wouldn't be too worried about an S corporation that pays its shareholder too much compensation, since that's basically what the IRS wants. However, I would be worried if the owner of the S corporation wants to pay too little compensation solely to save taxes.
 

#14
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I'd also bring up that reasonable compensation is not one exact number. There should be a range of which our clients should be able to take based on a multitude of factors.

Assuming the owner is the president/CEO of the business which is large enough to net a million dollars, one could easily justify a salary in the $200-$300k range. If he wants to pay himself $249,999 to avoid paying the Additional Medicare tax, is that really a big deal? (Of course, for this example please forget that his wife works).
 

#15
eze  
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Three lines come to mind from your post:

"Your return is on extension at no charge. It's time to find a tax preparer that better matches your risk profile for taking aggressive tax positions. I wish you continued success."

I'm not against taking some risk if the client wants to be aggressive. But these clients that have a new angle every year that they heard about from their buddies at the country club are trouble. Their numbers fluctuate all over... based on their latest angle and then they get pulled for audit. And they usually are not the personality type to take responsibility for the risk that they wanted to take...they'll be pointing the finger at you. Run....
 


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