S-corporation Tax Return - No Shareholder Compensation

[Hoosier]

Picked up a client that performs appraisal services. His 1120S shows around $187k in profits for 2024. He took no salary, no compensation, no W2. He did however take $177k in distributions for 2024.

I advised him that we should reclassify at least $60k in distributions to salary, prepare 941s, pay payroll taxes (even though late), and a prepare W2. He refuses and wants to file as is with no shareholder compensation.

My questions:

*What are the chances of him getting audited based on knowledge of S-corps and shareholder compensation?

*Do you happen to know if submitting this tax return is considered inappropriate in any way from a preparer standpoint? In other words, am I as a preparer subject to scrutiny or penalties for preparing and filing this return? I don't think the return is fraudulent or anything of that nature but I'm not for sure. I haven't had a situation quite like this before.

*How would you handle this client and this situation?

[TaxGuyBill]

He refuses



*What are the chances of him getting audited based on knowledge of S-corps and shareholder compensation?

*Do you happen to know if submitting this tax return is considered inappropriate in any way from a preparer standpoint? In other words, am I as a preparer subject to scrutiny or penalties for preparing and filing this return?

He "refuses"? For me, that may not be a client. Is he willing to do it correctly for 2025?


The audit rate for Reasonable Compensation is very low.

There has been occasions the preparer has held some responsibility, but it is rare and it would not apply in your case (the first year and you are advising him after-the-fact).

However, in my opinion, you need to specifically ask him (in writing) something like "how much of the $177k that came from the business and went to you personally was to compensate you for the 'work' you performed for the business?" If he says any amount, that needs to be entered as compensation on the 1120-S, not as a distribution. In my opinion, you can't enter it all as "distributions" unless you ask that to the client; otherwise you COULD be responsible for misclassifying the payments.

[kathyc2]

The question shouldn't be will it get audited but rather do you want to put your name on an incorrect return. Could it be that previous preparer refused and he is now looking for someone to lend their name to the return as he wants it to be?

Depending on the circumstances the 60K may be woefully low. If he alone is doing all the work, the W2 should be the majority of profits. If he has several people working for him to generate profits, the W2 can be less than profits but more than W2 of highest employee performing appraisals.

[Hoosier]

The question as to whether or not this return will likely be audited is not THE question but it is a relevant question. The client doesn't care about the ramifications of my name being on the return. However, if this return is filed and is likely to be audited, now I've got something that will grab his attention to get this situation corrected from a payroll standpoint. And yes, he is refusing to comply to this point. And yes, he will not be a client if he insists on filing an incorrect return. I'd like to convince the client to correct the payroll before terminating the relationship. I sincerely appreciate the responses.

[Lion]

I don't like to rewrite history. It's 9 March so I'd either prepare the return to report what actually happened in 2024 and then disengage, OR offer to e-file extensions to give him time to find a new preparer for 2024.

I'd warn him in writing that NO shareholder/employee compensation is incorrect and also a red flag when distributions were made.