Insights and Resources

Treasury watchdog: Focus on S corps and shareholder compensation

ARTICLE | September 30, 2021

Authored by RSM US LLP

The Treasury Inspector General for Tax Administration (TIGTA) recently summarized its findings concerning efforts by the IRS to identify S corporation reasonable compensation issues. The report concludes that the IRS is likely failing to adequately identify S corporations that are underreporting their shareholders’ compensation in an effort to avoid employment taxes. Interestingly, in its response, the IRS largely disagreed with the inspector general’s conclusions and its related recommendations.

What TIGTA Found & Recommended

The TIGTA’s report concludes that the IRS selects S corporation returns for review at an extremely low rate (0.2% of all S corporation returns were subject to a field exam during fiscal years 2017-2019). It further concludes that during those field exams, officers’ compensation was examined at a rate less than the estimated general population compliance risk. The report notes that even in cases where S corporations had a single shareholder owner and did not report any officer compensation, field agents routinely failed to select these returns for examination.

As such, the TIGTA recommended that the IRS more thoroughly evaluate the risk of noncompliance on this issue and update its examination plan to increase the likelihood of identifying the issue.

Beyond field examinations, the report also recommended the IRS leverage recent compliance initiative projects under the employment tax division that are aimed at identifying S corporation returns with officer compensation issues, as well as evaluate using compensation thresholds and related quantitative criteria to help identify the issue for field examination.

IRS Response

The IRS largely dismissed the TIGTA’s recommendations, instead expressing confidence in its current policies and procedures and suggested that its assessment of noncompliance risk was likely more accurate than that of the TIGTA. In response to the TIGTA’s recommendations, the IRS: a) expressed confidence in its existing examination plan and its ability to identify the compensation issue, b) dismissed the use of compensation thresholds, asserting that revenue agents were adequately trained to identify the issue, and c) indicated that it already uses results from other established workstreams to inform their actions.

Practical Insights and Potential Impacts – Reading the Tea Leaves

The IRS’ rejection of the recommendations is interesting. Superficially, the IRS responses seem to indicate it is happy with the status quo. However, a closer read of the TIGTA report in conjunction with the IRS’ responses might signal that the IRS is already looking at the issue, perhaps more carefully now as part of other compliance campaigns.

Certain comments in the report may provide insight into how the IRS is thinking about the issue. Specifically, the TIGTA report references a new project created by the IRS in August 2020, “to focus additional resources on the issue of officer’s compensation associated with S corporations.” Although the TIGTA report redacted the project’s quoted objective, references elsewhere in the report to this new August 2020 program allude to a possible focus on compensation and distributions.

So, while the IRS disagreed with the form of the TIGTA recommendations, it may not necessarily disagree with the underlying substance or point of the recommendations – i.e., how to better identify issues with S corporation officer compensation for examination. This remains an important item for S corporations to consider, as it is clear that the IRS continues to focus on the issue.

Let's Talk!

Call us at +1 213.873.1700, email us at or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Ed Decker and originally appeared on Sep 30, 2021.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

​Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how ​Vasquez & Company LLP can assist you, please call +1 213.873.1700.