Any compensation the owner receives is subject to FICA tax,
which imposes an equivalent burden. And the IRS frequently attacks
owners who receive cash distributions from an S corporation,
arguing that the distributions were essentially disguised
compensation. The IRS often wins those cases, in full or in part,
and may collect penalties.
A previous post described that
many taxpayers have turned to doing business as an S
corporation. S corporation income is not subject to SE
tax. That post described how a taxpayer failed to structure his
business in a way that qualified for the S corporation exception to
SE tax.
When taxpayers cannot reach agreement with the IRS, often they
file a petition in Tax Court and negotiate with the IRS some more.
Doing so lets them avoid paying tax until the dispute is finally
resolved. However, recently the Tax Court decided that it could not
hear certain disputes over whether distributions from S
corporations should be reclassified as
