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Seems as though they are using the S-corp in an attempt to bypass socsec/med tax because the net income of the S-corp is not subject to SE taxes, However, if the owner is not receiving a salary from the S-corp which would approximate reasonable compensation for someone of his/her level of expertise, then this is potentially a big problem. You might want to have that conversation with the client and make sure they are committed to paying themselves reasonable compensation going forward. If not, then it would be wise to pass on the relationship. Whether they do anything about prior-years' returns is an open question, but you definitely should not get on board with continuing this practice (if my assumption is correct that this is what is happening).

Not sure if this refers to the McGladry article or the court cases, but I want to share what I learned about case law in my master's program (which was a law course, taught by JDs, because the IRC is a law). Case law is like building a brick building, brick by brick, and never gets old unless the law itself changes. Courts routinely rely on previous decisions made by other courts, mainly adding clarity to a similar case or dissecting a nuance. In fact if there is no case law for a particular issue, courts go back to English Common Law--what the English settlers brought with them to America! While in academic writings we seek the "latest" research, in case law 1957 (or 1857) is just as good as 2017. When you're trying to gather substantial authority, don't be afraid to cite "old" court decisions. PS. Edsel is making a wise decision to pass this one on to someone bigger and smarter, with more E&O insurance.

The headline says "preparer" but I only see taxpayer penalties. If my client forgets about a 1099 vendor and only tells me in June, how can I be subject to penalty?

https://www.forbes.com/sites/anthonynitti/2014/02/04/tax-geek-tuesday-reasonable-compensation-in-the-s-corporation-arena/6/#5cf75f1641a2. See the last paragraph of the article. This is a contentious issue, but if the shareholder received no distributions then perhaps there is nothing to re characterize.

The idea probably came from your statements indicating that he retains title, that you were thinking of putting them in service, and that he has a contract to sell 12-18 months later. The more I hear and think about this, the more convinced I am that these towers should not be in a business and listed as in service by him. I'm still circling back to thinking of this as one gigantic construction transaction because of your statements about the revenue stream subsidizing his construction costs that sound a lot more like progress payments based on the a project's completion than anything else so that at a minimum he covers his cost and the large chunk of profit is realized at the end. Maybe the real question here should have been something like "in what period(s) is the sale recognized and reported?"

These had best be taxpayer penalties. The date is March 25, 2018 and I am filing a Sch C for a small business proprietor. He hasn't issued any 1099s yet, and depends on me to do so. These will be late. Am I the party that's going to be penalized? Better not. I'll tell the client to do his own, which means the IRS will never get the information. Some of these ridiculous government actions have unintended consequences. The most prodigious example is a regulation in Great Britain which forces hospitals to see emergency patients within 8 minutes of their entry. It is not uncommon to see dozens of cars circling the hospital because they won't allow entry into the facility.

I see plenty of reasons to back off from this one. Choice of entity is not generally a "back-off" flag for me - as long as the reason to have me involved in the decision is tax and accounting repercussions, not legal. As soon as the discussion approaches legal, I tell folks "I'm not a lawyer and don't even play one on television" which generally makes them laugh but reinforces that I don't provide any legal advice - except to talk to a lawyer for legal advice! In this instance, though, it seems that the legal aspects are substantial (conglomerates all by themselves are a big flag; THEY will have big-ticket lawyers watching their interests, the builder should have equal protection).

True, he is taxed on profits whether distributed or not, but paying a distribution shows that the entity has the ability and willingness to pay the shareholder even though he may be rolling a substantial amount of resources/profits into new projects.

That doesn't make sense to me since the the taxability of income from an S Corp is based on S Corp profits not on whether income is distributed. You should take a good look at all the components of reasonable compensation for this client .

Did the SCorp shareholder take any distributions? A discussion during a CPE class seemed to imply that no distributions means there is nothing for IRS to reclassify as missed reasonable salary.

The more I read comments and learn from the available material, the more inclined I am to believe this entire thing should be considered a single construction project with revenue to be recognized on a percentage-of-completion method. The percentage-of-completion should be based on projected timing of receipts instead of projected cost estimates-to-complete.

Where on earth did the idea come from that he has to wait 12-18 months for his money? He does have expensive legal advice and banking advice - whether it's "quality" or not, I dunno. He has been quite business savvy in the past - I also suspect he has phantom backing from a couple of US congressmen. The awarding of contracts this large is tampered with by vested interests behind the scenes more often than not. He also thinks he has "quality tax advice" - y'all can comment if you wish. I'm thinking he'll need to get this advice from someone who has more E&O insurance than I do... Do any of y'all want to be recommended to this guy? You perhaps can make a little money.

I also wonder how your client will make the cash flow work paying for all the labor and construction expenses then having to wait for 12 to 18 months . He will definitely need quality legal advice plus an ironclad contract.

(CPA Practice Advisor) - All in an effort to minimize filing fraudsters, the IRS has accelerated major information form filing. And to drive home their emphasis, the IRS has drastically increased preparer penalties. http://www.cpapracticeadvisor.com/news/12375789/irs-increases-penalties-for-income-tax-preparers-in-2018

I'm right there with you on this! We're supposed to work for our clients, not act as gatekeepers for the IRS.

The light at the end of the tunnel, IMHO, is when the IRS stops making our offices the stopping point for welfare checks. Nobody should ever get more refund than they pre-paid in taxes without going to a government agency and qualifying for free money. It infuriates me, can you tell? But, I smile and do the Dorito Dance with every big (honest) refund because that's my job. I have a few substantial LLC single owners who routinely use their business account for personal use. I am now insisting they hire a bookkeeper or I am no longer doing their tax returns. Fortunately, I have enough clientele to make these demands. The risk to us tax pros is too great these days, to play around with Sch C's and refundable credits. No refundable credits on this particular return, but I recently had a Single Owner LLC tell me that she did her own taxes this year. She just used MY work from last year, took my numbers out and plugged hers in. I have been doing her taxes for at least 15 years. My only response was, "Good luck with that. I hope it doesn't blow back on you." I felt like I was robbed at gunpoint. Oh, and the best part? I was dropping off the Easter Cantata booklet and CD so she would sing in the choir with us. Praise The Lord! ermagerd