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TAX COURT DOESN'T PENALIZE DOUBLING DOWN ON S CORP SALARY

December 19, 2006

The tax preparer for an S corporation inadvertently double-deducted the owner's salary on the corporation return. The IRS was miffed and tried to impose a substantial underpayment penatly on the taxpayer. The Tax Court yesterday ruled in the taxpayer's favor:

The error underlying petitioner's income omission of $173,093, wherein his accountants failed to remove that amount from salaries generally when they separately stated it as officer compensation in the electronically stored version of petitioner's S corporation's Form 1120S, resembles the kind of isolated computational error generally intended to give rise to relief.

Tax lawyer-blogger Kreig Mitchell comments:

My problem with this type of case is that the IRS did not concede the case at the administrative level or in court. It is this type of denial at all cost stance of the IRS that results in a number of taxpayers simply paying the tax – especially if they cannot afford to take the IRS to court. I suppose the lesson is that taxpayers should not let the IRS bully them, especially when the IRS takes a frivolous position.

Link: Thrane, T.C. Memo 2006-269

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