IRS to Target S Corporation Distributions, IRS Chief of Employment Tax Says

August 18th, 2008 · No Comments

John Tuzynski, IRS Chief of Employment Tax, SB/SE Speciality Programs, has announced that the IRS is expanding efforts to close the $15 billion dollar tax gap in the employment tax area. Specifically, Tuzynski stated that S corporation shareholder wages and the issue of reasonable compensation for services rendered would be a target area.

For a good primer on the issue of reasonable compensation see the Journal of Accountancy’s, S Corporation Profits or Payday? by James A. Fellows and John F. Jewell.

Tuzynski stated that tax return preparers would be subject to preparer penalties if they prepared S corporation returns that reflected a “less-than-market’ salary for services rendered by small business owners.

For at least the last five years the IRS has been threatening to go after S corporations that understate owners’ compensation. I have been involved in dozens of S corporation audits in the last ten years and have not had a single IRS examiner raise this issue.