What about Bob and his nightmare

[ILLMAS]

Seems like a real story about reasonable compensation.
 

https://rcreports.com/blog/tax-man-cometh/?mibextid=Zxz2cZ

[Margaret CPA in OH]

Wow!  I'm glad I no longer do business returns, especially S-corps.  At least the few that I did do had something close to a reasonable salary.  It's sad how much we are being held responsible our client (mis)behavior even after the fact.  It seems, in this case, unless the client self-prepared the corp return, any preparer would be held liable even if for a new S-corp client.

[ILLMAS]

24 minutes ago, Margaret CPA in OH said:

Wow!  I'm glad I no longer do business returns, especially S-corps.  At least the few that I did do had something close to a reasonable salary.  It's sad how much we are being held responsible our client (mis)behavior even after the fact.  It seems, in this case, unless the client self-prepared the corp return, any preparer would be held liable even if for a new S-corp client.

I found it odd, in all the years as a tax preparer, reading, tax seminars etc...  I have never heard of the IRS penalizing the preparer for a "reasonable salary" until this story.  I see myself and other preparers dropping their non-payroll 1120S clients.

[Medlin Software, Dennis]

13! clients with sketchy shareholder(s)? A pattern which should be penalized imo.

It is not hard to see what comps are with a novice online search. Or even something like the salary exempt (the assistant manager scam threshold) or some reasonable multiple of min wage x X #40 hour weeks per year. 
 

For me, I always pose the question to the shareholder to prove out why they should not be aiming for SS limit wages each year before taking a dist. Those who are scamming RC are not likely setting up a retirement plan which beats SS when considering all SS benefits (spouse, children, disability, survivors, SSDI for disabled child).

[Lee B]

Obviously there is a due diligence question here.

If it had been just one client, it would probably have never happened.

It appears that he was targeted because he had multiple clients in this situation.

Years ago I picked a new client, an 1 employee S Corp who had an appliance repair business.

At the time I picked him up he had a very low monthly salary which was not reasonable.

It took me 4 or 5 years gradually raising his monthly salary bit by bit before it was at the low limit of reasonable.

It took me that long because he had cash flow limitations due to spending everything he made.

 

[Medlin Software, Dennis]

3 hours ago, cbslee said:

It took me that long because he had cash flow limitations due to spending everything he made

This is the one I hear as the prime excuse. Nothing left to pay myself.

But inevitably, they take distributions in some manner, such as expense reimbursement, medical insurance, car lease, etc. Some just cannot grasp they have to pay themselves wages at least min wage for all time worked, overtime when required, THEN, if there is anything left, other things can be paid. I try to remind that they must treat themselves the same as a stranger employee, to deaf ears.

If there really is no money coming in, then they can pay themselves as a payable, equity, or whatever their accountant prefers.

Not that I do tax returns for others. It comes up when someone asks me how to create a one off check for the prior year, or an end of year check to cover wages or to make withholding. 

[Corduroy Frog]

7 hours ago, cbslee said:

Obviously there is a due diligence question here.

 

I think so.  We should have enough insight to judge whether a self-appointed salary is out-of-kilter under the circumstances.  And I believe there should be a long rope in judgement before penalizing a preparer.

I also believe IRS personnel should be held to applying the same standards for C Corps as for S Corps.  The effects and audit objectives are vastly different but the standards should be the same.

[Max W]

There may be some thresh hold line the IRS is using, such as gross receipts, or company earnings over say $200K, $400K.

There is a company that specializes in determining reasonable salary, taking into account that one person owners of S-corps provide various functions that would be at a lower hourly rate.  can't remember the name of the company, though.

[kathyc2]

The site this article is on is in the business of selling reports for reasonable salary.  I'm guessing there is more to the story than what was in the article.  But fear sells......

[Max W]

39 minutes ago, kathyc2 said:

The site this article is on is in the business of selling reports for reasonable salary.  I'm guessing there is more to the story than what was in the article.  But fear sells......

Ah,Yes.! RC Reports is the company that I was thinking of in my previous post.  Since they are selling a service, they most likely took the most egregious case they had in their records.  Of course, they could have made it up.   Since it involved 2009, 2010, most likely it would have been audited in 2011, unless there is no lookback limitation on this.     The IRS is most likely doing the same as it has before, but with the talk of hiring new agents and and increasing the number of audits, RC Reports is just trying to capitalize on everyone's fears and as kathyc2 says "fear sells".

[Medlin Software, Dennis]

2 minutes ago, Max W said:

"fear sells"

Just like the AV industry.  AV software can only protect you from known issues, which you should never subject yourself to anyway.  Their WAG methods only serve to annoy you with "false positives" and to sell their services.  Or the extended "warranty" industry.

Had I thought/bothered to investigate the creator of the document referenced, I would have dismissed it as puffery, unless I could back it up elsewhere.  But, RC issues are a constant PITA for anyone who has to deal with the know-it-all owner/shareholder type or their "friend" who keeps telling them to take no wages.

[ILLMAS]

2 hours ago, kathyc2 said:

The site this article is on is in the business of selling reports for reasonable salary.  I'm guessing there is more to the story than what was in the article.  But fear sells......

I did not catch that, thanks for pointing it out.  

[michaelmars]

I just don't buy this story.  If all the accountants refused to do these returns then they wouldn't even collect income taxes.  its either BS or there is much more to this.  Maybe he advised the CPA on how to avoid payroll taxes.  

[Terry D EA]

15,000.00 in legal fees to boot. I too question the authenticity of the story. I wonder if Bob used any engagement letters to support his claim of preparing the return from the information provided. After a couple of years, I think the client should be told to take the reasonable salary or move on to someone else. I guess what you have knowledge of makes you guilty if you go along with it.