"CCH, to my surprise, does not have a client letter on this subject."

A client has just started working as a bartender.  He asks, "how much of my cash tips should I report?"  Surprisingly, CCH doesn't have a client letter on that subject either. 

The answer, of course, is that "it's all income, so all of them should be reported."

But then, should you add? "Very few people do that, though.  IRS has guidelines to figure the minimum amount  they would find acceptable in an audit.  Let your conscience be your guide, but also keep that IRS method in mind."

So it's like the "reasonable compensation" discussion. Tell your clients that there are sources for finding what amount applies to the work they do in the business they own in the location they chose.  That is what IRS expects them to report as reasonable compensation.  But you can add, "very few people do that.  Audits are rare, and a certain discount from reality will probably be accepted.  Let your conscience be your guide, but definitely report something and file quarterly payroll returns to avoid penalties."

What's interesting is that for every court case where IRS claimed compensation was too low, there is another one, involving an 1120 rather than an 1120-S, where they claimed it was too high and really a disguised dividend.