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Unreasonable Compensation Defenses Lawyers

Tax law is one of the most complicated aspects of the United States legislation. There are rules regarding how the IRS can operate, how different tax payments are calculated, what constitutes an avoidance of tax payment, and how to go after delinquent taxpayers. One of the issues that you might run into is the concept of unreasonable compensation. This has become a more serious issue in recent years, resulting in the IRS looking closely at the compensation of company executives.

If you believe you may be the target of an unreasonable compensation investigation, you should talk to an attorney. They will be able to explain the situation, whether you have anything to worry about, and how you can avoid raising red flags in the future. They can also take you through the investigation process so that your rights are respected. If you are accused of wrongful compensation, your lawyer will create a defense strategy.

There are three main types of entity that the IRS tends to look at heavily when pursuing wrongful compensation cases. These include:

  • C corporations that might have paid employees who double as shareholders too much
  • S corporations that might have paid employees doubling as shareholders too little
  • Nonprofits whose key leaders might have increased their own pay beyond reasonable limits

Each of these situations is approached somewhat differently by the IRS. In each case, they’re looking for tax liabilities and tax evasion, but the method by which the taxes are evaded varies.

With C corporations, business owners and shareholders can avoid paying taxes by overpaying the employees who own shares. There are tax laws that allow C corporations to deduct any income that they pay in compensation to their employee shareholders. But the income has to be “reasonable.”

The key is for the investigator to find something called a disguised dividend. This is when a company is making a taxable profit, but they pay it out as compensation instead. Compensation is deductible income, but dividends aren’t. If the IRS finds income that should have been reported as a dividend, they may send the corporation a tax bill based on the dividend amount.

This means that you will lose the tax exemption on the income. In addition to paying back taxes, you’ll need to pay penalties and interest.

S corporations operate differently. In this case, the IRS is looking for signs that the employee shareholders are being underpaid. If the salaries are too low, that might indicate that they are funneling extra income into shareholder profit distributing.

Distributions are not classified as payroll taxable income. But a regular paycheck is. An employee might take extra distributions and a lower salary just so that they don’t have to pay federal taxes on the majority of their income.

Just like with C corporations, S corporations are bound to make their compensation “reasonable.” The definition of reasonable might vary, but it can’t include severely underpaying employees.

Nonprofits are entities that specifically do not generate a profit. The money they make goes back into the operation. They are subject to strict reporting standards, including the need to account for exactly what they do with every dollar in their budget.

The biggest red flag that the IRS looks for in nonprofits is key employees raising their own salaries beyond a reasonable level. In doing so, they effectively profit off of the nonprofit funds.

When the IRS finds unreasonable compensation among nonprofit executives, it qualifies the amount as “excess benefit transactions.” This is then given excise taxes. The person who received the compensation must pay a 25 percent tax, and the nonprofit managers that allowed the issue to happen unchecked will be given a 10 percent tax.

In these cases, you’ll only need to pay the excise tax based on whatever amount is considered “in excess.” Anything below that is not subject to the penalty. It’s important for nonprofit employees and accountants who work with nonprofits to understand the liability that they might have for excess compensation.

You might be shocked and offended to have your pay rate questioned by a federal auditor. But you shouldn’t react out of anger. Don’t say anything to them except that you’re going to consult with your lawyer. Then contact an attorney.

IRS investigators are trained to gather incriminating evidence from everything they do. That includes not just documentation, but also interviews. Everything you say will be twisted and used in the case against you. You can’t help yourself without legal counsel.

A skilled attorney may be able to defend you against the accusation by proving that you are not unreasonably compensated. They can point out your duties, accomplishments, qualifications, and role in the company. Documenting your value to the company is an essential part of proving that you are worth your salary.

There’s more to your defense than your prior experience and education, too. You might demonstrate to the IRS that you have industry connections and a reputation that the company can’t afford to lose. Similarly, if you’re good at communicating, you’ll be a valuable employee of any organization.


Charle Butler
Charle Butler
2021-03-12
Verified
I was hesitant to hire the Spodek Law Group. I read reviews and knew they have a great reputation. However, I thought I would spend money and not see or speak to my attorney. From the beginning to end of my case Todd and the entire staff were available and willing to help. We worked towards and end result that was way above my expectation and Todd delivered. I am forever grateful for patience and long days and night spent working on my case. Thanks Todd and the entire team!
Mesonista parsons
Mesonista parsons
2021-03-05
Verified
My attorney at Spodek was Abigail. She was very knowledgeable and helpful with all my questions and concerns, as well as responsive. Her fees are affordable and Abigail took the time to make sure I understood everything relating to my case. I highly recommend Abigail and will request her services in the future.
debabrata chakraborty
debabrata chakraborty
2021-03-03
Verified
Todd A Spodek is the experienced and best criminal lawyer at USA. He is very professional and always respond on time. Alex also very cooperative and always help me. They took care me and my problem like family member. I am 100% satisfied for their professional service. My result was unexpected and amazing. They dismissed my case. I am really grateful to them. I will recommend you to go there if you want to solve your problem. I wish all the best for them.
Asata Hendricks
Asata Hendricks
2021-03-02
Verified
Truly appreciate the work the guys did!. Exceptional team & I know they care about each and everyone of their clients. I am super thankful to be referred to Spodek Law Group and I am grateful Todd & Alex were able to work diligently to achieve an outcome I am pleased with. Despite COVID they stayed on top of things and kept me informed every step of the way. Very thankful.
Mike Moroff
Mike Moroff
2021-02-26
Verified
I'm very satisfied with the services rendered by Todd, Alex and Mary Lou. I whole heartedly recommend Spodek Law Group . I've worked with and have retained other attorneys in the past with Todd's firm being the cream of the crop for many reasons. A very serious legal matter was resolved after a year's hard work and effort. Todd expertly guided me through the process and was able to navigate and make the good journey bearable as well as successful. Mary Lou initially provided excellent assistance before referring my case to Todd. Alex's support was effective and timely. The customer portal (MyCase) is an invaluable communication tool that also kept track of my case. Various aspects of my case were explained and there were several options provided but I made the final decision of how the case would be handled. The legal fee was reasonable considering the effort and amount of work plus it was a flat fee regardless of the length of time required to conclude my case. Todd made himself available to me and we had many scheduled meetings to go over the progress and to discuss the next steps. I felt more confident after many discussions with him. You will not go wrong choosing Spodek Law Group for legal matters.
Josh Katz
Josh Katz
2021-02-24
Verified
Being that it was the first time that I was in need of an attorney, I was afraid and hesitant and knew I needed the absolute best. It is beyond understood why Spodek Law Group has a reputation of being the top, if not the best law firm in New York. Alex and Abigail were there every step of the way even at the most unconvenient hours. I could not have asked for more. They are extremely good at what they do and they delivered much much more than just winning my case. A big thank you to Alex and Abigail for all the guidance and counseling and their upmost loyal support that extended far more than just legally. If you need the absolute best than don't hesitate to hire Spodek Law Firm.
L.C.
L.C.
2021-02-24
Verified
I cannot tell you how thankful I am to Todd and Alex for their hard work and dedication to my case. I had never been in any trouble before but I had an unfortunate event occur and in the midst of COVID-19 at that therefore I knew I needed a team that was dedicated to my success. Today- my case has been finalized and I’m walking away with no record and can continue life as a mother and a Grad student worry free. I cannot express enough gratitude for their assistance.
AnnMarie Soliman
AnnMarie Soliman
2021-02-23
Verified
I received a summons and called Spodek law group for a free consultation. Alex took my call and was very quick and responsive. He was available anytime through multiple platforms and very reassuring when needed. They are extremely organized and thorough. They got my case dismissed! I’m very grateful. Thank you Alex and Todd!

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"Spodek Law Group have offered me excellent support and advice thru a very difficult time. I feel I've dealt with someone who truly cares and wants the best outcome for you and yours. I'm extremely grateful for all the help Spodek Law Group has offered me. I can't recommend them..."

David Bruce

"Spodek Law Group was incredibly professional and has given me the best advice I could wish for. They had been helpful and empathetic to my stressful situation. Would highly recommend Spodek Law Group to anyone I meet."

Rowlin Garcia

"Best service I ever had. Todd is absolutely class personified. You are in the safest hands with spodek. They have their clients interest in mind."

Francis Anim
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