Preparer penalties regarding S corp compensation

[Evan S. Golar]

I don't know Jainen - you sound like a retired IRS employee who doesn't deal very much with ignorant, stubborn, rigid, clients-who has much PRACTICAL day to day dealings with clients. You seem to have a very easy solution and esay answer to just about every subject that comes across the boards you respond to where the responses by us as practitioners aren't so simple.

WE CAN'T CONTROL OUR CLIENTS' actions. Did I say that loud enough for you?

IRS continually shifting more responsibility down our backs by passing the buck. First it's e-filing - where we are now responsible for filing clients' returns. Then it's RALs, and RACs (where I do NEITHER) where you're providing banking services. And each time you go that one extra step - you're opening the door further for liability exposure.

Why should I be responsible for a (Sub-S) client, sole owner, who refuses year after year to take a salary?

I have a prime example of one right now.

Facts are: Client (100% shareholder of S Corp) operates this business after working hours - he has a full time job during daytime. Uses available business cash to make personal mortgage payments for his house - knowing that it's a distribution and he has to pay income tax on Sub S profits, but refuses to take a salary to then personally pay his mortgage. I have sent letters to him advising him of the situation - he keeps putting it off, yet still wants me to prepare the 1120S and personal returns in spite of it.

Now IRS wants to place ME responsible for this.

Get real!!!

[jainen]

>>a very easy solution and easy answer<<

I daresay it is somewhat easier to make an unfounded guess about someone's credentials, as you have done, than to quote legal authority for a tax position, as I have done.

>>WE CAN'T CONTROL OUR CLIENTS' actions<<

Yeah, man, I heard you. Did you hear ME when I said this is NOT about the client's actions? It's about how the PREPARER fills out the tax return, which hopefully he or she does have a little control over.

Sure the IRS is shifting more responsibility to professionals--isn't that a GOOD thing? Aren't we glad that they are no longer sending letters about how they lost a return or typed it wrong (which clients used to blame us for anyway)? Aren't we proud that our industry has ethical standards we can point to in serving our clients? Well, at least I am.

[Catherine]

>>Our job is to tell our clients what the rules are, and to prepare an accurate return based on what they have chosen to do<<

In my opinion, our job is to comply with the law which clearly imposes a duty of "due diligence" and avoiding a return "that demonstrates an intentional disregard of a rule or regulation" unless it also contains a disclosure of "a good faith challenge." (Quotes from Circular 230). You may hold a different opinion, which I suppose is why Congress had to establish preparer penalties in the first place.

I agree we can't force the client to change practices, and have stated that agreement at least twice already in this thread. The company can do whatever it wants with its money. The issue is solely how to fill out the tax return, not how to run the business. If they come to me for tax preparation, I must use my best professional judgment in reporting the payments the way that the tax code defines them. There may be some room for the client's preference for a conservative or aggressive stance, but that is limited and certainly doesn't extend so far as reporting distributions without ANY salary. If a client does not care for my professional judgment, why in the world would he ask me to do the return?

You completely neglected the portion of my response that talked about attached statements. If the client "intentionally disregards a rule or regulation" despite strong recommendations to the contrary, the penalties should fall ON THAT CLIENT, and NOT on the preparer. The preparer HAS performed due diligence in this area by informing the client, making strong recommendations, and then attaching the disclosure to the return.

The snide remark about "Congress had to establish preparer penalties in the first place" is a personal attack. And has no place in this forum.

I have respected your opinions in the past and have followed some lively threads with interest, striving to see the point of view presented by various people, always to my benefit and learning. But my respect for you has fallen significantly today.

[Evan S. Golar]

Catherine - it's quite apparent that jainen is more concerned with impressing us with his importance than he is with what we're saying. It's not on only this board, but on every board I go on where he responds. Apparently seeing his post in response to virtually every poster's questions, seems to boost his ego.

[jainen]

>>every board I go on where he responds<<

I post on three tax boards. One is a public forum where I give general answers citing IRS Pubs and instructions. One is a tax reference board, where I give researched citations of regs and case law. And one is this ATX Community where I discuss professional issues such as client relations, citing various sources and labeling my posts as opinion.

Catherine, I apologize for the pronoun "you" when I meant an impersonal "someone." Circular 230 says whatever it says; anybody can read it and decide if I quoted accurately. The same document (closely based on the Internal Revenue Code) establishes the authority for penalties because of the possibility that a practitioner would violate the sections I quoted. The authority specifically identifies those sections by number, which is how I got the opinion ("I suppose") that one lead to the other.

I try to be clear in explaining how I reach my opinions as well as in the opinions themselves. Others may express other opinions, with or without explanation.

[kcjenkins]

My point was that the IRS should not be allowed to assess penalties for actions we take that are neither falsely reporting the business results nor hiding a variance from what the IRS considers 'good practice'. Since the IRS has the corporate officer's salaries on a separate line, there is no further need for us to 'highlight' this item. They have had the ability to identify those companies who do not pay salary to their officers since the Sub S return began. This is simply a combination, IMO, of revenue generation and preparer intimidation, to try to make us do even more of their work for them. That is what needs to be pointed out the Congressmen.

[Catherine]

>>every board I go on where he responds<<

I post on three tax boards. One is a public forum where I give general answers citing IRS Pubs and instructions. One is a tax reference board, where I give researched citations of regs and case law. And one is this ATX Community where I discuss professional issues such as client relations, citing various sources and labeling my posts as opinion.

Catherine, I apologize for the pronoun "you" when I meant an impersonal "someone." Circular 230 says whatever it says; anybody can read it and decide if I quoted accurately. The same document (closely based on the Internal Revenue Code) establishes the authority for penalties because of the possibility that a practitioner would violate the sections I quoted. The authority specifically identifies those sections by number, which is how I got the opinion ("I suppose") that one lead to the other.

I try to be clear in explaining how I reach my opinions as well as in the opinions themselves. Others may express other opinions, with or without explanation.

Apology accepted.

There are certainly preparers who disregard the rules. I had a client whose previous preparer told her to sign and mail in her returns as "self-prepared" because there was less chance of an audit that way. The return he had prepared was a masterpiece of creativity and fantasy, and he deserved either a medal or jail time; perhaps both.

[Catherine]

My point was that the IRS should not be allowed to assess penalties for actions we take that are neither falsely reporting the business results nor hiding a variance from what the IRS considers 'good practice'. Since the IRS has the corporate officer's salaries on a separate line, there is no further need for us to 'highlight' this item. They have had the ability to identify those companies who do not pay salary to their officers since the Sub S return began. This is simply a combination, IMO, of revenue generation and preparer intimidation, to try to make us do even more of their work for them. That is what needs to be pointed out the Congressmen.

Well said, KC.

There are two functions being spliced: accurate preparation and reporting of what actually occurred, and enforcement of accounting/tax rules at the specific taxpayer level.

The first is the job of tax preparers. Advice and recommendation on the second is also the job of tax preparers. But enforcement is the job of the collecting agency. Trying to force us to take on a role not our own will drive away people who can't stomach being an IRS enforcer. It will increase the number of poorly prepared returns submitted (either self-prepared or done by unqualified preparers). And as these requirements keep creeping in, clients will lose the sense of us as their allies and reliable resources, and they will start to hide information from us. Ultimately, it serves no one.

OK. Time to leave this thread and go write my congresscritters. Unfortunately for me, being in ultra-liberal Massachusetts, my congresscritters have never seen a regulation they didn't want to expand.... I am reminded of a line from Tolkien, "...over the years we have fought the long defeat" (paraphrased).

Catherine

[SunTaxMan]

Steve Jobs and Warren Buffet salary is $1.00 per year. Maybe we can go with that as a comparison.

But those are not "S-Corp" salaries, are they?!?!

Apples and oranges?!?!

[kcjenkins]

I agree Cathrine, but still, if they got a real SURGE of letters from preparers, they are political enough to react to it. And after all, this is not about expanding the government's reach into the taxpayers pockets. It's just about fairness to the preparers who help the government to get their money.

I would also hope that each of the national organizations like NATP etc would consider funding a court challenge of the first member they have who is penalized under that position. And advertise that fact, to their members, so that we end up with several challenges fought through the courts, because I believe that we would win. It's just that many preparers would not have the resources to carry on such a fight, on their own, so they would pay up by default. What do the rest of you say to putting forth such a suggestion to any tax organization you belong to?

[Catherine]

I agree Cathrine, but still, if they got a real SURGE of letters from preparers, they are political enough to react to it. And after all, this is not about expanding the government's reach into the taxpayers pockets. It's just about fairness to the preparers who help the government to get their money.

I would also hope that each of the national organizations like NATP etc would consider funding a court challenge of the first member they have who is penalized under that position. And advertise that fact, to their members, so that we end up with several challenges fought through the courts, because I believe that we would win. It's just that many preparers would not have the resources to carry on such a fight, on their own, so they would pay up by default. What do the rest of you say to putting forth such a suggestion to any tax organization you belong to?

I'll suggest it to the NAEA and my state affiliate (MA). Unless someone else has national connections; I just pay my dues every year nationally but am more involved at the state level.

Catherine

[Randall]

Well said, KC.

OK. Time to leave this thread and go write my congresscritters. Unfortunately for me, being in ultra-liberal Massachusetts, my congresscritters have never seen a regulation they didn't want to expand.... I am reminded of a line from Tolkien, "...over the years we have fought the long defeat" (paraphrased).

Catherine

Was that Gandolf or Mr. Frodo?

[ACS41]

Asking the NATP and others act on our behalf seems like a very good idea. Since my South Florida Congressman Wexler actually lives in Maryland, that will be little use to me. From reading the many comments listed, it seems different individuals are going to handle the little or no compensation differently. From the start it seems to me that if a client takes zero salary, he/she is an idiot. Especially if they have been told over and over why they need to do so. Nevertheless, we cannot force the client to pay the payroll taxes. At that point we are reporting the truth. I will certainly reevaluate each client's situation and decide on a case by case basis what to do. I for one am not in the business of relinquishing monthly retainer fees, annual tax fees, and other billable services to clients who just don't get it.

[JohnH]

cred65 - is this what you wanted bumped?

[lbbwest]

In my area; many local attorneys have been touting Sub-S as a vehicle to avoid social security/medicare taxes on the working shareholder for years. In fact combined with the limited liability aspect it was considered the primary reason for incorporation. For years it has been the norm among the trades, bars & restaurants etc. $500 salary, the rest flow thru. Any educated practitioner has been aware of the Tax Court rulings for years; and the shareholder compensation or lack there of has been readily apparent on returns for years...the small number of audits has been and will continue to be accelerent for noncompliance. Once these urban myths have been created they die hard. I don't think preparer penalties will affect more than a very small number of preparers; they haven't so far. I had lunch last tax season with a local CPA whom explained that he had a client that chose his vehicle mileage from the last five digits of a random phone number from the phone book. However, it was the representation of the client, and when he inquired about the log, they guy said Oh, yeah. I asked if he had trouble signing the return under penalties of perjury....NO. Trust me, most people in my area would prefer him preparing there return over me. I am not concerned about preparer penalties. lbb

[cred65]

cred65 - is this what you wanted bumped?

Yes, JohnH. Thank you.