Unreasonable compensation is one of the IRS' favorite ways to increase your total tax payment. The IRS likes it because the IRS gets to define what is reasonable — and because business owners and executives are attractive targets.
They Hit You High and They Hit You Low.
When a closely held corporation is a "C" corporation, the owner has an incentive to pay the profits out as compensation because compensation is deductible, but dividends are not. The IRS may challenge the compensation paid to the owner as "unreasonable," meaning "too high," in an attempt to have the corporation pay tax on a portion of the compensation as a dividend
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By contrast, in the case of a closely held "S" corporation, the owner may try to pay out the bulk of the profits as dividends rather than as compensation to avoid paying FICA (Social Security), FUTA (Federal Unemployment) as SDI (State Disability Insurance). In those cases the IRS has an incentive to re-characterize a portion of the dividends as compensation.
So the IRS can audit you for having a compensation package that is either too high or too low. The IRS knows how much you should be paid better than your board of directors does.
Always a pleasure
"It is always a pleasure to be on the same team with Bruce and Owen. They are smart, tough, thoughtful and creative." B.A., Esq.
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The tax lawyers of Givner & Kaye have significant, successful experience in handling these matters, including the victory in L&B Pipe & Supply Co. vs. Commissioner, 1994 T.C. Memo 187, in which the IRS originally sought nearly $2,000,000 in taxes, interest and penalties, and was awarded zero by the United States Tax Court.
"Bruce gives you full undivided attention as if you were his only client. He is very responsive to e-mail and will even go beyond the normal hours of business to get you answers late at night if you have anything you need to discuss." J.L.
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Californians Bruce Givner and Owen Kaye bring reason to the discussion of unreasonableness. We have guided many executives through tax challenges based on salaries and benefits. You do not have to accept the compensation the IRS assigns to you. With careful documentation and industry-wide research, we can show that you have the qualifications that your compensation requires, that your company has benefited from your management, and that your compensation is not out of line with the worth of executives at other companies.
Of course, the best approach is to consult with us in the planning stage, to avoid the problems before they occur.
Call or e-mail Franchise Tax Board Protest attorneys Bruce Givner and Owen Kaye of Los Angeles to address your major tax issues.