S-Corporation Tax Controversies: Defending Against IRS Reasonable Compensation and Other S-Corp Audit Issues S-Corporations remain one of the most popular business structures in the United States, with millions of active S-Corp returns filed annually. They also remain one of the IRS's top audit targets. The reason is straightforward: the IRS believes that S-Corporation shareholders routinely underpay employment taxes by characterizing what should be compensation as distributions, depriving the government of billions of dollars in Social Security and Medicare taxes. Whether you are facing an IRS audit challenging your S-Corp officer compensation, dealing with distribution recharacterization, or confronting other S-Corporation tax disputes, understanding the issues and mounting an effective defense is essential to protecting your business and personal finances. At Neil Jesani Advisors, our team of Tax Professionals, CPAs, and Enrolled Agents has extensive experience representing S-Corporation owners in disputes with the IRS. From reasonable compensation audits to S-Corp election challenges, we provide comprehensive defense at every stage of the controversy process. Why S-Corporations Are a Top IRS Audit Target The fundamental tax advantage of an S-Corporation is the ability to split business income between compensation (subject to employment taxes) and distributions (not subject to employment taxes). While this is a perfectly legal structure when properly implemented, the IRS has identified a significant "tax gap" resulting from S-Corp shareholders who set their compensation unreasonably low to minimize employment tax obligations. The IRS estimates that underreported employment taxes from S-Corporations represent billions of dollars in lost revenue annually, making S-Corp compensation a perennial enforcement priority. The IRS has dedicated examination resources specifically to S-Corporation compliance, training revenue agents to identify and challenge inadequate officer compensation. The agency has also invested in data analytics tools that compare reported compensation levels against industry benchmarks, flagging returns where officer compensation appears disproportionately low relative to...