Could S-Corp Payments Draw IRS Ire?
A recent tax court ruling against an advisor using an S corporation to draw a salary could put the model used by many advisors at risk by drawing scrutiny from the Internal Revenue Service, one lawyer tells InvestmentNews.
Ryan Fleischer, owner of Omaha, Neb.-based advice practice Fleischer Wealth Plan, an S corporation, tells the publication that the court’s ruling “puts thousands of reps in the crosshairs of the IRS, and could be detrimental to them.”
A lawyer who asked to remain anonymous in case he gets work surrounding the issue, tells InvestmentNews that this was more of a one-off case. But the lawyer also says the case could hurt a business model used by many advisors, the publication writes.
In 2012 the IRS ruled that Fleischer owed $40,000 in back taxes for improperly using the S corporation model to pay himself a salary from 2009 to 2011, InvestmentNews writes.
In 2010 FWP paid Fleischer around $35,000 in salary. His business income from the S corporation was $147,600 and he didn’t report any amount for self-employment tax purposes, according to court documents cited by the publication.
The IRS claimed that the advisor should have been reporting his business income on Form 1040 and Schedule C because he was a sole proprietor. Fleischer sued the tax agency in 2015, InvestmentNews writes.
At the end of last year, however, a tax court judge took issue with the fact that Fleischer was being paid by LPL Financial, his broker-dealer, while his S corporation was not, according to the publication. His contracts with LPL, as well as a separate contract with Massachusetts Mutual Life Insurance Products, didn’t mention his S corporation, InvestmentNews writes.
The court ruled that Fleischer should have reported his income earned under his rep agreement with LPL and broker agreement with MassMutual individually and not through FWP.
When InvestmentNews first wrote about the case in October, several readers contacted the publication and said the IRS took notice because Fleischer didn’t pay himself a large enough salary through the S corporation and therefore made it seem like he was trying to avoid employment taxes. But Fleischer tells InvestmentNews this was simply “government overreach.” He also tells the publication he’s unlikely to appeal the court’s decision because he’s spent $50,000 already fighting the judgment.