General Articles

How S Corporations Can Avoid Unreasonable Compensation Audits

By July 31, 2015 No Comments

A recent article by Stephen D. Kirkland published in the Journal of Accountancy, discusses the red flags the IRS looks for when identifying compensation audits for S Corporations (S-Corps). The biggest red flag the IRS identifies is insufficient compensation paid to shareholders. While many S-Corps reduce compensation and increase distributions for tax reasons, this is one of the most prevalent reasons for an IRS examination. The tax rules that apply to compensation of shareholders and officers for S-Corps is not simple, but these nine items can go a long way toward helping S-Corps file returns that achieve the best results:

  1. Identify the officers
  2. Find the correct business activity code
  3. Confirm percentage of time devoted to business
  4. Be consistent
  5. Encourage each shareholder who works for the company to take reasonable compensation
  6. Encourage shareholders to maintain written logs
  7. Explain the rules to clients
  8. Provide comparability data
  9. Encourage shareholders to minimize loans from the company

For more information on S-Corps and compensation audits, please visit the referenced article by Stephen D. Kirkland in the Journal of Accountancy, or contact Terry Maycroft at or (231) 726-5825.

Accounting Services