ABSTRACT
The fact that S corporations are required to pay reasonable compensation to shareholding employees is well established. In this paper, three S corporation reasonable compensation cases are discussed to demonstrate the issues faced by the taxpayer, as well as the penalties and professional responsibility problems that may impact the tax preparer. Analyses of the cases indicate that (1) paying low S corporation salaries leads to taxpayer penalties, and (2) that the language in Treasury Circular 230 may allow the IRS to apply penalties to the tax preparers involved with these cases. However, there is no evidence that the IRS has imposed penalties on the preparers related to these or any other S corporation reasonable compensation cases. I briefly review a series of preparer penalty cases in an effort to show that preparer penalties have been applied to situations bearing similarities to S corporation reasonable compensation cases.
