Summary: The US Employment Tax Case

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In recent years, the Northern Iowa Accounting Firm has seen a similar trend in regards to S corporation clients. The clients pay an unreasonably low compensation to their shareholder-employees which provides the corporation with an opportunity for a tax advantage. In prior cases where the IRS questioned the S corporation’s unreasonably low compensation, the Tax Court frequently dismissed the case without questioning whither the S corporation underreported the corporate officer’s wages. Since this is a client trend, it is important that all team members remain up to date on tax issues and developments that relate to S corporation distributions and wages. If a federal tax development arises that could impact our clients, the S corporation …show more content…
Over the years, it has been found that taxpayers have turned to creating an S corporation to avoid self-employment tax. Most S corporation employment tax cases often involve a similar situation of an individual trying to shift income to the corporation, creating an opportunity for a tax advantage. In the tax court, the taxpayer often takes the position that the shifting of income is a distribution rather than compensation. However, a more recent federal tax development questioned the jurisdiciton over certain S corporation employment tax cases. This would put taxpayers at a significant disadvantage and the Internal Revenue Service (IRS) at a significant advantage in S corporation reclassificaiton cases. To clarify the tax treatment of this particular employment related claim, PMTA (Program Manager’s Technical Advice) 2017-005 provides legal advice in stating that the Tax Court does not have jurisdiciton under Sec. 7436 to review a determination that a corporation is liable for additional employment taxes due to the IRS’s recharacteriziaiton of payments made to, or on behalf of, corporate officers who were treated as …show more content…
In more recent cases, the outcome is found to often favor the IRS’s position. The guidance underlying the dismissal of numerous cases regarding S corporation employment tax reclassifications can be found in Sec. 7436. It is important that accountants who advise S corporation clients understand the position that the IRS is taking in the related cases. The IRS is taking the position that the tax court does not have the jurisdiction over certain S corporation employment tax reclassification cases. PMTA (Program Manager’s Technical Advice) 2017-005 provides further legal insight on the vigorous debate. In more recent cases, the tax court is no longer holding that it has the jurisdiction with respect to an employment status controversy specifically in regards to S corporation employment taxes. The reasoning being is explained by breaking down and understanding the guidance provided in Sec.
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