Has anyone been Audited for S Corp errors? Worried I might get flagged

What if you already filed incorrectly for a couple years? Can you file amended returns to fix the S Corp salary issue or is it too late once you've filed the original return?

You can absolutely file amended returns to correct S Corp salary issues from previous years. Filing Form 1120S/X for the corporation and potentially amending your personal return would be advisable. This often looks better than waiting for the IRS to discover the issue during an audit. The key is calculating what constitutes a "reasonable salary" for the specific work being performed. You'll need to issue retroactive W-2s and pay the employer and employee portions of Social Security and Medicare taxes, plus any penalties and interest for late payment.

How exactly does taxr.ai work? Do they just give you advice or do they actually help you file amended returns too? I'm in a similar situation with my S Corp but I'm not sure where to start fixing it.

Sounds like another overpriced service. What makes them different from just hiring a good CPA who specializes in small business? I've been through an audit before and having a human who knows your specific situation is way more valuable than some AI tool.

They analyze all your tax documents and then give you a complete report showing your audit risk areas and specific recommendations. They don't file the amended returns themselves, but they provide clear instructions on what needs to be fixed so you or your accountant can do it correctly. Their system looks at thousands of real audit cases to identify patterns that trigger IRS attention. It's different from a regular CPA because they're focused specifically on audit risk rather than just tax preparation. I actually took their report to my CPA who was impressed with the detailed analysis and used it to help file my amended returns properly.

How does this actually work? I tried calling the IRS multiple times about my S Corp issues and just get stuck on hold forever. Is this service just going to charge me to wait on hold? Seems sketchy.

Yeah right. No way they can actually get through to the IRS that quickly. I've tried calling about my business tax issues for MONTHS. Even my CPA can't get through in less than 2 hours. I'll believe it when I see it.

It's not sketchy at all - their system basically waits on hold for you and calls you back when they get through to an agent. You don't have to stay on the line yourself during the hold time. They use technology that navigates the IRS phone tree and holds your place in line. I was totally skeptical too before trying it. The way it works is they have some kind of system that keeps dialing and navigating the phone tree until they get a human, then they connect you. The IRS doesn't give them special access - they're just more persistent and efficient at getting through than we can be individually.

Dude that's literally the worst advice ever. Just because you haven't been caught yet doesn't mean you won't be. The statute of limitations is typically 3 years but extends to 6 years for substantial understatements of income. If the IRS does catch you, you'll owe all back payroll taxes PLUS penalties PLUS interest. Not worth the risk at all.

I'm just sharing my personal experience. The reality is the IRS audit rate is incredibly low, like less than 1% of individual returns. It's even lower for S Corps - they only audited about 0.2% last year. I'm not saying it's right for everyone, but the fear of audits is overblown. Most small business owners I know play it fast and loose with some rules and never face consequences. It's all about risk tolerance.

We formed the S Corp in March 2023, but started running income through it in April. You make a good point - we didn't clearly separate the January-March income that should've been on Schedule C. Do you think this makes an audit more likely since the numbers might look inconsistent to the IRS?

That timing definitely needs to be accounted for correctly. For January-March 2023, that income should have been reported on Schedule C with self-employment tax paid on it. Then only April-December income should flow through the S Corp. This kind of mid-year split actually increases audit risk because the IRS might notice income reporting that doesn't align with when the S Corp election became effective. You should consider amending to properly allocate the income between Schedule C and the S Corp based on when payments were actually received. This inconsistency plus the missing W-2 wages could together raise multiple red flags.

Thank you for this balanced perspective! I'm actually in a very similar situation with my consulting business. Just started as an S Corp last year and realize I made the same mistake with the W-2 wages. Your point about proactive amendment is really reassuring. I've been paralyzed by fear of making it worse, but it sounds like taking action now is better than waiting. Do you have any rough guidelines on what percentage of S Corp income should typically go to reasonable salary vs distributions? I know it varies by industry, but just trying to get a ballpark sense of what "reasonable" looks like for professional services. Also curious - when you say "amend your personal return," what specifically would change on the 1040? Would adding W-2 wages from the S Corp actually increase our overall tax liability since we'd be paying more in payroll taxes?

Great questions! For reasonable salary percentages in professional services, I typically see 40-60% of net business income going to W-2 wages, but it really depends on your specific role and local market rates. The IRS looks at factors like your responsibilities, time spent, industry standards, and what you'd pay someone else to do the work. You're right that adding W-2 wages will increase your overall tax burden - that's exactly why the IRS scrutinizes S Corps with zero wages. You'll pay both employer and employee portions of Social Security/Medicare taxes (15.3% total) on the salary portion, which you were avoiding before. However, this is the legally required trade-off for the S Corp tax advantages. On your personal return (1040), you'd add the W-2 wages to your income and potentially see changes to things like QBI deduction calculations. The S Corp distributions would decrease correspondingly, but distributions aren't subject to self-employment tax, which is the main benefit. I'd definitely recommend running the numbers both ways - comparing your original filing vs. amended filing - so you know exactly what the additional tax liability will be before you file amendments.

This is incredibly helpful information! I had no idea about the S Corporation Employment Tax Compliance Initiative - that explains why I've been so worried about getting flagged. The fact that they have automated systems specifically looking for zero W-2 wages makes me think I really need to act fast. The Voluntary Classification Settlement Program sounds promising. Do you happen to know if there are specific forms or procedures to apply for that, or is it something you just mention when filing amended returns? I'm also curious about your documentation approach - when you say you used Bureau of Labor Statistics data, did you just pull general salary ranges for your job title, or were you able to get more specific regional data? I'm trying to figure out what would be considered reasonable for freelance design work in my area (mid-sized city, not a major metro). Your point about First Time Abatement is reassuring since we've always filed on time and paid what we thought we owed. Thanks for sharing your experience - it's exactly the kind of real-world perspective I needed to hear!

You raise an excellent point about corporate formalities that I think gets overlooked too often. From what I've seen, the IRS can definitely challenge S Corp status if the entity isn't being treated as a true corporation. Missing board resolutions, commingled accounts, and lack of formal corporate documentation can all support an argument that it's really just a sole proprietorship trying to avoid self-employment tax. Your point about the reasonable compensation calculation is spot on too. The IRS uses a multi-factor test that includes not just comparable wages, but also the amount of time devoted to the business, the complexity of the work, and yes - the return on invested capital. So even if design work typically pays $60K as a W-2 employee, an S Corp owner might justify a lower salary if they can document significant business investment, equipment purchases, or irregular income patterns that reflect entrepreneurial risk. I'd definitely recommend anyone in this situation to start documenting corporate formalities going forward - annual board resolutions, separate bank accounts, formal meeting minutes, etc. It's not just about the wage issue; it's about maintaining the legal separation that makes S Corp treatment valid in the first place. One more thing - has anyone looked into whether their state has additional S Corp compliance requirements? Some states are even stricter than the IRS about reasonable compensation requirements.

For most S Corp reasonable compensation issues, a good CPA who specializes in small business taxation should be sufficient. You'd typically only need a tax attorney if there are potential criminal implications (which is extremely rare for honest mistakes like yours) or if the IRS is alleging intentional tax evasion. The staggered amendment approach you mentioned is interesting - I hadn't heard of that strategy before. It makes sense from a cash flow perspective, though I wonder if it might actually draw more attention by creating multiple amended return filings over time versus addressing everything at once. Your point about state safe harbor provisions is really valuable. I wish more accountants would mention these guidelines upfront when setting up S Corps. The 1/3 rule you mentioned aligns pretty closely with what I've seen recommended for professional services, though as you noted, it really depends on the specific circumstances. One thing I'd add - if you do decide to work with just a CPA, make sure they have specific experience with S Corp amendments and reasonable compensation calculations. Not all CPAs are equally familiar with the nuances of S Corp compliance, and you want someone who can properly document the justification for whatever salary amount you choose to report.

You've put together a really solid action plan! As someone who's new to this community but has been lurking and learning from everyone's experiences, I wanted to add one small suggestion that might help with step 3 (calculating reasonable compensation). When you're researching local market data for freelance design work, don't forget to look at contractor/freelance rates in addition to employee salaries. Since your husband was doing client work as an independent contractor before the S Corp, the "reasonable compensation" calculation might be more complex than just looking at what design employees make in your area. The IRS considers factors like whether you're doing the same type of work you'd hire an employee for versus more specialized consulting/creative work that commands higher rates. For design work specifically, there can be a big difference between someone doing routine graphic design tasks versus strategic creative consulting. Also, documenting the business development and client management time your husband spends (beyond just the actual design work) can help justify the salary calculation. These are often overlooked when people just look at "designer salary" data. Good luck with getting everything sorted out - sounds like you're taking all the right steps to address this proactively!