Preparer penalty reminder

[Jesse]

This was just in todays NATP newsletter:


* * Reminder: Preparer Penalties Extend Beyond Income Taxes * *

John Tuzynski, Chief of Employment Tax, SB/SE Specialty Programs stated in today’s SB/SE meeting that the IRS will continue and expand upon federal and state partnerships particularly in the QETP (Questionable Employment Tax Practices) Program. Aside from expected increased audit inquiries as a result, NATP’s Government Relations Liaison, Larry Gray, was quick to ask about the section 6694 penalty implications. Mr. Tuzynski responded that the IRS anticipates that it will home in on the stated $15 billion tax gap in the employment tax area. He specifically stated that 1120S salaries and the issue of reasonable compensation would be a target and that tax return preparer’s were exposed to penalty assertions if they prepared returns that reflected a “less-than-market” salary for services rendered by small business owners of Sub S corporations.

[solomon]

... tax return preparer’s were exposed to penalty assertions if they prepared returns that reflected a “less-than-market” salary for services rendered by small business owners of Sub S corporations.

So the preparer determines the market salary? Nonsense - just more scare tactics which will increase as winter approaches. What happened to the good faith clause in 230 with adequate inquiry when necessary - it is still there.

[Skate1968]

???

It's my understanding that an 1120S stockholder needs to take more than half of his withdrawals in salary. Do you think that this will no longer be a good rule of thumb?



thanks for reading

[solomon]

It's my understanding that an 1120S stockholder needs to take more than half of his withdrawals in salary. Do you think that this will no longer be a good rule of thumb?



thanks for reading

"Rule of thumb" and "market salary" are not synonymous.

[WhiteOleander]

This just doesn't make sense to me.

If an S-Corp comes to me to file their return and I see that they have not taken enough or any wages for for the "owners", the IRS says I will be penalized if I file the return?

How could I possibly remedy the situation? It is past the end of the year, so there's no way for the owners to now take a wage. That would be back dating and would be illegal. So, now they cannot file their return and the IRS has forced them into non-compliance of properly filing the return?

Something is missing here. If the IRS wants to go after the owners for not properly paying themselves, that's one thing. But, I certainly have no control over what the corp does.

[erchess]

Reasonable Wages

In North Carolina there were at one time Labor Market Analysts at the Employment Security Commission who will interview the S Corp Owner about such things as the income and profitability of the business, the hours invested, the number of employees supervised, the nature of everyone's day to day activities in the firm and possibly other factors and they will issue a written opinion as to what constitutes fair market value of the owner's activities. I don't know if they will still do all this for you but I am sure that at the very least they would have ample statistical information for owners and tax advisers to pour over and reach reasonable decisions.

Of course none of that helps when the S Corp does not become our client until after the year is over.

[BHoffman]

Sch C

I have put income on the shareholder's Sch C in order to at least get them credited with paying some SE tax, and shown that amount as officer compensation on the 1120S. So far, no comments from IRS.

[BOB W]

Reasonable salary is what is left over after computing> return on capital investment, working capital needs, (maybe) loan repayments to reduce corporate debt and any other excuse that can be devised as a acceptable reason NOT to take a paycheck. When you run out of reasons you then have "reasonable salary"...................What do you think????

[veritas]

Sounds like

I have put income on the shareholder's Sch C in order to at least get them credited with paying some SE tax, and shown that amount as officer compensation on the 1120S. So far, no comments from IRS.

a preparer penalty to me.

[Edsel]

What About Info?

And just where does IRS think preparers are going to get this information?

Their answer might be what is in their audit guide - geographical statistics about salary information, work descriptions, etc.

Works fine for them. What do we add for being an owner? 50% owner? 100% owner? How much salary do they get when corporation has a loss? Don't tell me that salaries in companies under economic depression remain bouyant - I know better. What kind of bonus?

Anyone out there have experience dealing with proposed penalties when the definitions are amorphous?

[joanmcq]

Zero or 10K out of 100K of a service-oriented 100% shareholder is not enough salary. If I did corps, which I don't just because I hate dealing with this crap, I would document my discussion with the taxpayer for paying reasonable salary, send letters, etc. It may not be easy to discern exactly what reasonable salary is, but its easy to determine what it isn't.

[joanmcq]

Zero or 10K out of 100K of a service-oriented 100% shareholder is not enough salary. If I did corps, which I don't just because I hate dealing with this crap, I would document my discussion with the taxpayer for paying reasonable salary, send letters, etc. It may not be easy to discern exactly what reasonable salary is, but its easy to determine what it isn't. If they have taken distributions (which I'm sure they have) you can file late W-2s.

[BHoffman]

a preparer penalty to me.

Sure does.

This is why I make it a standard practice to get with all my existing SCorp clients before the end of the year.

With this focus on the issue, I'm probably not going to take any new SCorp tax clients after 12/31 unless reasonable salary has been paid to the officers.

[WhiteOleander]

Sure does.

This is why I make it a standard practice to get with all my existing SCorp clients before the end of the year.

With this focus on the issue, I'm probably not going to take any new SCorp tax clients after 12/31 unless reasonable salary has been paid to the officers.

See, this is my point. I would definately take them as a client. Why let the IRS determine my income because they "claim" they can penalize me for something I have no control over? They want to try to make me an auditor and arm of enforcement for them. But, I didn't do anything wrong by preparing the return.

I'm still not sure this penalty could be enforced. Or that we even have the whole story on it.

[Edsel]

Oleander is right

..and usually so is Ms. Hoffman. I wonder if she would refuse a new S corp who didn't pay a salary because they have a loss...

...yes, we have a good idea what a reasonable salary "isn't" but IRS will consider a salary too low if it from an S Corp and the exact same salary too high if it is a C Corp. It all depends on how it serves their purpose. And we are going to get penalized because we are not subject-matter-experts on this?

I don't think so, Oleander, but you raise an interesting point. Can they really make such a penalty stick? I don't know but I would think it would all depend on the burden of proof. Of course, they could assess hundreds of penalties before anyone took them to court (and they know this).