No S-Corp shareholder wages in prior years

[NW Accountant]

Hi there!

An S-Corp has not filed a return since 2013. The client is now needing to get caught up and is asking me for help. I know that an S-Corp shareholder is supposed to take a reasonable wage but what do you do if the years have already passed and they never took a wage? All the way back to 2014! 

Do I need to worry about any years that she incurred a loss? 

Thanks in advance!

[sjrcpa]

Client is already in deep 💩. Late filing penalties galore.

I would file based on what did or did not actually happen. Tell client to do it right from now on.

IRS could reclassify any distributions as wages.

Get paid upfront.

[TaxGuyBill]

In my opinion, if they took money out of the corporation for personal use, that *IS* wages first, then distributions, and late payroll returns need to be filed.

If they did not take any money of the corporation for personal use (such as years when there is a loss), don't worry about it.

[NW Accountant]

This is good advice. What about filing the return as is, leaving the distributions, but adding a disclaimer to the letter stating that the IRS can reclassify distributions to wages and if so, additional taxes will be owed and payroll returns will need to be filed for any applicable periods, etc.?

[NW Accountant]

If I did this, would I be okay to add a disclaimer to the return letter that states that the IRS can reclassify distributions to wages and additional taxes and payroll returns if that does happen? 

[sjrcpa]

IRS does not need permission. You can certainly tell your client in the letter.. Also tell them about the late filing penalties.