Updates and guidance on key IRS practice developments.

AuthorChambers, Valrie

Practice & Procedures

Transcript of account issued by the IRS

The Internal Revenue Manual (IRM) contains the procedures for all areas the IRS administers. It includes matters such as policies for information technology, submission processing, Examination and Collection processes, Appeals, Criminal Investigation, and the Taxpayer Advocate Service. The manual is available on irs.gov.

Information-processing procedures are found in Part 3 of the IRM. Among other materials, the section provides instructions for coding and editing tax returns for computer processing. Special codes are used in performing specific functions.

An individual master file (IMF) is used to record transaction and financial entries for individual tax returns. Its counterpart is the business master file (BMF) for business returns.

The IRS maintains a transcript of account for each filed tax form. A transcript shows most entries on a tax return. It includes data on an amended tax return, payments, penalties, and other processing activities.

A transcript may be obtained online at the IRS website by first registering at Get Transcript Online and then ordering the document for the appropriate taxpayer. If a person does not want to get an online transcript, a call may be made to 800-908-9946 to request that one be mailed. A person who has a power of attorney may call the Practitioner Priority Service at 866-860-4259.

Often, an authorized tax practitioner will request a transcript for a client to find what information was reported on a prior-year return, to respond to an IRS notice, to find what action was taken on an amended return, or to check the status of a claim for refund or status of the processing of Form 1045, Application for Tentative Refund.

When a transcript is obtained, it is important to know the meaning of transaction codes shown on the form. Document 11734, Transaction Codes Pocket Guide, which is issued by the Service, should be read for an abbreviated listing of the commonly used codes. A complete listing of the codes is in Document 6209, IRS Processing Codes and Information; however, some information in that publication is redacted.

The chart on the next page contains a list of common codes and their titles.

By knowing the applicable codes, practitioners should more easily be able to determine if the IRS has correctly processed returns and has taken the correct actions on events subsequent to the filing of returns. Thus, practitioners will be providing quality service to clients.

From Joe Marchbein, CPA, CGMA, Ellisville, Mo.

Items and factors to consider in setting reasonable compensation

Whether amounts paid by businesses to shareholder-employees qualify as deductible compensation or should be characterized as distributions or gifts has long been a source of tax controversy, one that often requires a careful analysis of all facts and circumstances to establish the correct characterization of the payments. To appropriately perform this analysis, all companies should maintain supporting documentation for the payments. Compensation for higher-paid employees and executives is especially at risk of IRS scrutiny.

Sec. 162 provides that only ordinary and necessary expenses incurred in carrying on a trade or business are deductible. Regs. Sec. 1.162-7(a) sets forth two requirements for compensation payments to be deductible, stating, "The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services."The amount of compensation may be considered reasonable if it is similar to that paid for like services by like enterprises under like circumstances. Factors in determining similar enterprises would include characteristics such as sales, growth, performance, and value. The amount of the compensation alone is insufficient.

Court cases have held that if the purported compensation is a distribution of profits, it is not compensation but is instead a dividend. However, payment for bona fide services rendered to the company should qualify to be classified as compensation. For it to be considered payment for services, one needs to consider multiple factors, such as the employee's qualifications; the employee's duties; the employee's background and experience; the employee's knowledge of the business; the size and complexity of the company; the employee s time devoted to the company; and the company's economic condition, both currently and in prior periods.

Some resources that might be helpful in making a determination include the Willis Towers Watson General Industry Compensation Policies and Practices Survey Report, the Economic Research Institute's compensation analysis services, and the Risk Management Associates Annual Statement Studies, which are all published annually.

Several court...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT