The Warnick Group Successfully Defends Client in IRS Audit with RCReports
Case Study
Customer Profile
Rebecca Warnick is a CPA specializing in the unique financial needs of party and event rental companies. With extensive experience in the industry, Rebecca provides tailored accounting and financial guidance, helping business owners understand and optimize their numbers without needing to be experts. Known for a proactive and personalized approach, whether through consulting, education, or expert tax strategies, Rebecca empowers event rental professionals to achieve greater financial clarity and success.
The Warnick Group is a boutique CPA firm based in Henderson, Nevada, with a strong reputation for providing personalized service to its clients. The firm, led by Rebecca Warnick, specializes in working with businesses that have 3-50 employees, including a niche focus on party and event rental companies. With a team of four employees and a client base of 50 core clients, The Warnick Group prioritizes close, advisory-based relationships, allowing them to dig deep into each client’s financial situation.
One of the key tools they use for their S-Corp clients is RCReports, the #1 reasonable compensation analysis solution. Rebecca first learned about RCReports through Jason Watson, a Colorado-based accountant and author of a book on tax-saving strategies for 1120-S and S-Corp owners. After incorporating RCReports into their practice, The Warnick Group found it to be an invaluable asset, particularly when it came to defending clients in IRS audits.
“I always want my clients to pay the amount of tax that they’re legally required to, but not a penny more. With RCReports we dial in the number and we have something tangible backing it up versus just picking a number out of the air. You have more confidence in knowing that you have the right number and you’ve got data to back it up should the IRS want to look at it.”
This case study illustrates how RCReports helped The Warnick Group navigate a challenging IRS audit for a high-earning client, ensuring the client’s reasonable compensation figures were accurate and defensible, ultimately saving them from significant financial repercussions.
The Problem: Facing IRS Scrutiny
In 2021, a successful S-Corp with $17 million in revenue in 2020, was flagged for an IRS audit and was referred to The Warnick Group by a former IRS agent for assistance defending the owner’s compensation as the IRS was particularly interested in the reasonable compensation reported for the client’s owner. The business’s salary reports didn’t align with its W-2 filings, raising a red flag for the IRS.
Reasonable compensation is a common issue for S-Corp owners. They need to balance what wages they pay themselves versus distributions. Pay too little in wages, and they become a target for IRS scrutiny. If they pay too much, the owner may be overburdened with unnecessary payroll taxes.
In this case, the client’s initial accountant had mishandled their filings by reporting high salary figures on the 1120-S but failing to issue corresponding W-2s. This discrepancy was a glaring error, and the IRS was ready to reclassify nearly all the business’s income as wages, which could have resulted in a significant financial hit.
The Warnick Group was tasked with completing a reasonable compensation analysis to help defend the client against this audit. The challenge was clear. They needed to prove that the wages the client took were fair and reasonable.
Learn why RCReports is the #1 reasonable compensation tool for accountants.
The Solution: Turning to RCReports
Rebecca Warnick knew she needed to provide a reliable, data-driven solution to convince the IRS that the client’s compensation was reasonable. That’s where RCReports came in. RCReports is the leading reasonable compensation analysis tool for accountants and S-Corp owners. By using RCReports, The Warnick Group could create a thorough report that would stand up to IRS scrutiny.
Warnick took a detailed approach to calculate the client’s compensation for 2021, 2022, and 2023 using RCReports. The software’s ability to factor in job responsibilities, time spent in various roles, and the market value of similar positions was crucial. It wasn’t enough to throw out a random salary figure. The numbers needed to be defensible and aligned with the work the client performed.
Using RCReports, The Warnick Group was able to generate a reasonable compensation report that showed the client had set an appropriate salary for the years under review. This was a drastic difference from the millions of dollars the IRS assumed should be classified as wages.
The Results: IRS Approval with No Penalties
With the RCReports data in hand, The Warnick Group and their client’s attorney presented the case to the IRS. They argued that while the client’s business was highly profitable, not all income should be classified as wages. The detailed RCReports analysis backed up their position, proving that the owner’s role in the company, though important, didn’t warrant the millions in salary the IRS was pushing for.
The most impressive outcome of this case was the response from the IRS. Initially, the IRS was prepared to reclassify a substantial portion of the business’s income as wages, which would have led to significant additional taxes and penalties. However, after reviewing the RCReports findings, the IRS backed down.
The client was not required to make any adjustments to their tax returns or pay any additional amounts.
Using RCReports Is a Must for Accountants
This case highlights the importance of using a tool like RCReports for S-Corp owners and their accountants. Reasonable compensation is a critical issue that can easily lead to IRS scrutiny if not handled properly. By using RCReports, The Warnick Group was able to present a solid, data-backed case that not only protected their client from potential penalties but also ensured that their compensation practices were accurate and defensible. Not only was this a win for the client, it was a win for The Warnick Group as they charged a fee of $5,000 for this analysis – providing instant ROI on their subscription to RCReports.
For any accountant or S-Corp owner looking to navigate the complex waters of IRS audits and reasonable compensation, RCReports is an indispensable tool. It helps you sleep better at night, knowing you have reliable data to back up your decisions and protect your clients from unnecessary financial burdens.
