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Does the IRS ‘have your number’?

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in Small Business Tax,Small Business Tax Deduction Strategies

Q. If I don’t take a salary as an S corporation owner, will this increase my chance of being audited? J.T.K., Cincinnati, OH

A. You do run an audit risk, but not for the reason you might think. The key tax rule to remember is that you should receive a reasonable salary for the services performed. Assuming you’re an employee of the company— not just a shareholder—the IRS may question whether you’re trying to avoid income and employment taxes on compensation if you receive no salary this year. Prepare for a possible IRS challenge by carefully documenting the reasons for your approach.

Tip: Under the new IRS program you referred to, individual returns will be selected for audit on a random basis. So it’s simply a matter of whether your number comes up.

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