Scorp officer salary issue

[RightOn]

The sole officer has been taking salary from a Scorp. But his wage last year is way too low. He is willing to take action to correct the situation. I wonder what options are still available to him now. Is there a standard procedure that can be followed to adjust the previous year salary of an Scorp officer in order to make it become a reasonable and acceptable (to the IRS) amount?

[ttbtaxes]

Were there also distributions taken by the shareholder during the year? Were there existing loans from the shareholder in prior years?

[JohnH]

You can amend one or more 941's for the prior year and pay the additional taxes. There will be some interest and perhaps small FTP or FTD penalties, but a simple estimate would yield the cost effect of all that. Then you'd need to correct the W-2 using a W-2c.

The simplest way might be to aggregate all the adjustments on the 4Q Form 941 just to keep it simple. For example, you could treat distributions in 1Q, 2Q, and 3Q as loans or advances, and then clear them out on the 4Q From 941. The decision on how to handle all this lies in the amounts of money you are talking about, but it might be better than doing nothing, depending upon the magnitude of the problem.

[geekgirldany]

I agree with John, it all depends on how much money you are taking into consideration. Amend 4th qtr 941 and all the other forms. He pays some interest and penalty but it will be better than having an audit. (if that would ever happen)

I've had to do the same thing with clients.

[ChEAr$]

HOWsomeever...............

OP didn't say how much was deemed unreasonable and what relation that was to net profit before any adjustment. IRS does not automatically use it's computer resources to search for any inkling of low salaries.
The alternative is to do nothing and for 2014, "go and sin no more".
I would outline both options to client and let him decide.
As for drawing IRS attention, "Do you feel lucky, punck?" Could be

[geekgirldany]

With me, if it is a new client, and they had no idea about the payroll. I will let it go the first year. They have to start doing some kind of compensation after that.

In the past I've told clients they comply or I can not do their tax return. I wonder how many tax preparers would continue to prepare their tax return?

[RightOn]

New development and Update

New development and Update:

I talked to the client again. I explained to them the requirement of reasonable compensation that should be paid to the officers. And I explained to them reasonable compensation is the market rate salary that they would have to pay someone else to perform the same duties that they have performed for the S-corp. Their reply is that they engage in real estate investment activities and they did not really do much at all. They hired real estate agent to look for the properties and they hired contractors to fix them up. And they said they would pay the same amount of salary, or maybe even less, if they had to hire someone else to do the same works. To cut a long story short, they are saying that what the Scorp has paid them is reasonable.

How would you go from here?

[JohnH]

You must make a subjective determination of whether or not you think the salary is reasonable, given all the facts & circumstances. Sounds like the client has already made up his mind. If you agree with him, it's time to get to work.

If you don't think it is reasonable, you need to tell him why and advise him of what he needs to do going forward. That may be amending last year, or it may simply be setting things right from this point on, as Harlan and geekgirldany have pointed out. If he refuses, you should decline to do the work. No sense butting heads with a client who knows more than you do, especially since they will throw you under the bus if an audit goes against them.

[Burke]

You need to answer the questions posed.

1. What was the net profit of the SCorp?
2. How much was the salary?
3. How much were the other distributions (i.e, money taken out of the SCorp and given to the owner/TP?)

[RightOn]

You need to answer the questions posed.

1. What was the net profit of the SCorp?
2. How much was the salary?
3. How much were the other distributions (i.e, money taken out of the SCorp and given to the owner/TP?)

Sorry I missed the questions:

1. About $250,000.
2. About $40,000.
3. $0.

[Burke]

So the SCorp is buying properties, fixing them, and selling them, I gather? And this is a one officer, sole shareowner? If he is reinvesting the profits in additional properties, it might fly.

[RightOn]

So the SCorp is buying properties, fixing them, and selling them, I gather? And this is a one officer, sole shareowner? If he is reinvesting the profits in additional properties, it might fly.

To make a correction, actually there are two officers. So it is $20,000 salary to each of them. And the profit is about $125,000 each of them. Does it make a difference whether it is sole owner or there are actually two owners?

By the way, as for your last question:

3. How much were the other distributions (i.e, money taken out of the SCorp and given to the owner/TP?)

Does the "other distributions" include the distribution of the profit to them? If yes, they did each receive $100,000 as distribution of the profit.

I was thinking the "other distributions" refer to distributions other than the profit. Please correct me if I have interpreted it incorrectly.

[RightOn]

By the way, this is their very first year in business as a Scorp, if it will make a difference.

[ChEAr$]

Doesn;t matter what year, first or not. You have advised the officers and they have made the choice. Case closed.
You do not have to tell them "go somewhere else." Just makes notes for the record, but lets face it, we do not control how
a client operates his business. It's not our job to tell them; only to advise.

[geekgirldany]

You do not have to tell them "go somewhere else." Just makes notes for the record, but lets face it, we do not control how
a client operates his business. It's not our job to tell them; only to advise.

So you would continue to file a return like OP described? Just wanting to know what others do as I have told clients I could not continue doing their tax return with little or no wages.
What if they were taking no salary at all? Would you still prepare the return.

Again I just want to know what others do.