IRS Revenue Agent Jobs
June 18th, 2008
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Question: Can someone please help explain to me where to start with this tax question?
Before paying salaries to its two shareholders, Steamboat Corporation has net income of $640,000 during the year ($1,200,000 revenue – $560,000 operating expenses). Dean and Mary are equal shareholders of Steamboat and work in similar jobs as employees of the corporation. Steamboat pays each shareholder-employee a salary of $320,000, which results in zero taxable income for the corporation. On audit, an IRS agent determines that $40,000 of the amount paid to each of the shareholders is unreasonable compensation. The shareholders’ tax adviser has told them that the IRS agent is probably correct in his determination. What effect will the IRS agent’s finding have on the taxable income of Dean, Mary, and Steamboat Corporation?
Thanks so much, I have been working on this question for a while now and cannot find an explanation in my book.
Answer: Warning: I am not an accountant. Let’s use common sense. They paid $320,000 to each of 2 people. The IRS says that was $40,000 too much. I would assume they have to adjust that down to $280,000 each. Each person loses $40,000 of taxable income. That removes $80,000 from Steamboat’s expenses, so Steamboat now has an $80,000 profit. I assume Steamboat may have to pay taxes on some of that. I believe what happens next depends on the type of corporation Steamboat is, but I repeat, I am not an accountant.
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