REASONABLE COMPENSATION
May 11, 2023
I need to alert you to new risks to the accuracy of your Reasonable Compensation figure. (Reasonable Compensation is the salary or wage that you, a shareholder-employee of an S Corp must pay yourself for the work you perform for your company.) The Qualified business income (QBI) deduction (created with the passage of the TCJA) is tied to Reasonable Compensation and creates the new risks (think tax, penalty and interest), if successfully challenged by the IRS.
Therefore, it is more important than ever that you have credible documentation to back up your Reasonable Compensation figure. The IRS criteria and guidelines state that “companies have the burden of showing compensation is reasonable.” To accomplish this and to avoid the 20% accuracy penalty the IRS states that:
a. The dollar amounts must be verifiable.
b. The taxpayer must be able to demonstrate the origin of the amount claimed.
c. The taxpayer must be able to show that he/she entered the amount in good faith.
We have the tools, available to you, that meet the above requirements and mitigate the risks associated with an IRS Reasonable Compensation challenge. Please contact me if you would like to discuss this issue further and/or to have Stanley J. Mroz CPA complete a Reasonable Compensation analysis with your input.
A Reasonable Compensation analysis is an independent, unbiased report that establishes your Reasonable Compensation, using criteria outlined by the IRS and Courts, and provides a defensible position to an IRS challenge.
A Reasonable Compensation challenge can be costly. Typically, taxes, penalty and interest are more than double the original tax that would have been owed – plus costs for amending returns (all totaled usually in the tens of thousands of dollars). In addition, the IRS is holding Tax Preparers responsible for unreasonable compensation assessing preparer penalties of up to $5,000.00 for signing off on an unreasonably high/low compensation figure.
Please contact me at your earliest convenience to take the necessary steps to protect yourself and your company.
Sincerely,
Stanley J. Mroz
