S Corp Reasonable Comp, per TIGTA

Technical topics regarding tax preparation.
#1
EADave  
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Hey guys, just relaying some information that came across the wires regarding a report TIGTA performed on S Corporation Returns as it relates to reasonable comp, or should I say, lack thereof....

Here's the report: https://www.treasury.gov/tigta/auditrep ... 0042fr.pdf

Here are the highlights:
TIGTA Report Number 2021-30-042 addresses broad compensation underreporting issues within S corps. There's a lot of interesting data to mull over in that report, but here's one of the biggest punchlines: 49.5% of S corps report zero officer's compensation. Half of S-corps. No reasonable comp. None.

A preparer could keep themselves pretty busy by marketing to S Corporations that are out of compliance; hint, hint... You could gain an accounting, payroll, and tax prep client all in one!
 

#2
JR1  
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Assuming they're willing! lol

Wow. And why hasn't IRS programmed to catch this all these years? Wow. I think a 4th grade could code something up for that to match 1120S filings against W2's.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#3
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I am of the opinion that until the IRS begins auditing the S Corps with zero officer compensation, quite a few taxpayers are willing to go with a preparer that says they are not required to draw a salary (so they can save payroll taxes). I have had several that I have explained the rules to that were not willing to get into compliance and went elsewhere. Sure wish IRS would crack down on this!
 

#4
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The more significant item in that report was that IRS (after TIGTA called them out) said they didn't see an issue here. They doubled down that their process for identifying issues and ensuring tax compliance is carried out is good. *smh*
~Captcook
 

#5
JR1  
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Wow. And it's such low hanging fruit.....
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#6
EADave  
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Just as the good Capt says, and as the report states, the IRS chose not to do anything (yet) with the RC issue/suggestions. Amazing!

However, I've been able to convince some of my S Corp folks to come back from the dark side with a good ol' fashioned Social Security monthly benefits estimation; that sobers the 40+ crowd up a bit. The 20 year olds, not so much.
 

#7
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This almost seems impossible to believe. I wonder if this a case wher the Big 4 or the next level national firms simply do not fill out the officer compensation section. Just about everyone of them will say “available upon request” whether for c Corp or s corp. they almost always leave the officer line blank even though I know that the officers took salary and quite large.

Big firm mentality? We do 50 or so S corps and everyone one of them is taking a salary and we record correctly
 

#8
Nilodop  
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I wonder whether the stats would change mchif they omitted the ones that not only took zero comp. but also zero distributions. Probably not, but I wonder.

I was unaware that the Big Four handled officers' comp presentation that way.
 

#9
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That statement is just based on the dozen or so I have seen over the years. But it seems that is their mindset. We are not giving you anything. Maybe some who actually worked there can weigh in
 

#10
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The House passed version of the 2017 tax act would have provided a 70% standard re reasonable comp.
Steve
 

#11
EADave  
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I suppose the IRS just wants the Federal Tax, as the FICA can’t be used (or can it?) for the Treasury’s overall budget. Wages or distributions, until 2018 (QBI), they were Federally taxed the same, so as long as the IRS gets theirs, they might just care not about the SS Admin getting theirs.
But, since the implementation of the QBI, this might affect their stance a bit, or, it might take them a full decade to catch on and by then, QBI sunsets. Who knows?
 

#12
novacpa  
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Reading the report, I find it the section(s) where IRS Management rebuts the findings of the TIGTA, compelling.
This "attitude" is wholly consistent with rejection rates in the IRS Whistleblower's Office, where the IRS "rejects" 96% of the WB claims filed.
They just do not want to do the work.
More perplexing to me, the report states the average time to complete an Audit is 1-year.
 

#13
jon  
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If the Green Book, Biden's tax answers, gets passed the calculation of taxes with S corps will be - if not materially working, 3.8% times income passed out to you, and if materially working pay the 13.%%??? on the income passed to the stockholders.
 

#14
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It's clearly being abused. And it's likely going to be addressed soon, either by legislation or IRS action. The big changes in the upcoming tax act for me relate to grantor trusts and GRATs.
Steve
 

#15
Andrew  
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TIGTA estimated 266,095 returns may not have reported nearly $25 billion in compensation and may have avoided paying approximately $3.3 billion in Federal Insurance Contributions Act tax.

One wonders why have laws if they're not enforced ... However, if a return is audited, and the tax professional prepared it without the officer taking any compensation, could this tax professional be held liable.. by the IRS or client?
 


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