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Hi I am presently being audit by the irs for the year 2007…

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Hi I am presently being...
Hi I am presently being audit by the irs for the year 2007 we sent out 1099,s may have missed on or two small ones but most subcontractors got them. while i was in business my company paid me 1200 a month in salary which we took out taxes and etc. my cpa said i could pay my self any amount. the irs said i didnt pay me enough . they want to tax me on what i didnt receive. I have been out of business scince 2008 my company no longer has any assets. we loaned the business most of the money to get it going. I took in salary what the company could afford to pay me .Because i am out business and was inc. Isnt this all a moot point for them.
Submitted: 8 years ago.Category: Tax
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Answered in 2 hours by:
6/25/2010
Tax Professional: Chad Oberg, Certified Public Accountant (CPA) replied 8 years ago
Chad Oberg
Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience: 10 + years of accounting and tax experience, financial statements and business planning
Verified

The IRS has the ability to assess additional taxes on a taxpayer if they deem that the taxpayer has not taken enough salary. The test that they perform do not take into consideration future years.

 

The following is an except from the IRS' guidance on this matter:

 

The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

 

Some factors considered by the courts in determining reasonable compensation:

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • The use of a formula to determine compensation

I am not sure where you are at in the discovery process with the IRS in this matter; however, I would instruct my CPA to prove to the IRS that the compensation was reasonable based on the performance of the company. This may be challenging if you had large amounts of taxable income at the corporation level and only a minor amount of salary. Show them compensation agreements (if available) or a formula on how the $1,200 was derived.

 

Ultimately, the taxing agencies (both federal and states) are desperate and are looking at all areas of the law to generate revenue. Documentation is key as is quantity. If you can provide a large quantity of documents to the IRS indicating why you took the salary of $1,200, you will have a greater success with the negotiation.

 

If you have any further questions, please do not hesitate to contact me.

 

Regards,

 

CEO, CPA

 

 

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Customer reply replied 8 years ago
what about the company having no assets or as an emploee am i responsible for the taxes
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