Inside the mind of the IRS re: reasonable compensation

BVWireIssue #152-3
May 20, 2015

Valuation analysts can now get a rare look at how the IRS examines reasonable compensation cases. The agency recently made public an internal document, “Reasonable Compensation: Job Aid for IRS Valuation Professionals,” which has a wealth of information to help valuators anticipate the challenges the IRS will make to reasonable compensation estimates. The job aid is available as a free download from BVR.

Treasure trove: The job aid, which includes a number of appendices, examines valuation approaches, compensation data sources, suggested reading material, and court cases that shape the IRS’s current thinking on this matter. It also discusses taxpayer arguments for levels of compensation that may appear to be unreasonable. For example, one argument for a high level of compensation is that an individual was underpaid in prior years. The job aid provides questions the IRS agent will ask when assessing that argument and also the relevant court cases on that specific issue. You’ll also find sample information document requests (IDRs), examples of the market and income approaches, and much more

In the job aid’s list of suggested readings, the first resource listed is the book Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes, by Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson), which is published by BVR. The authors will be giving us their comments on the job aid in a future issue of Business Valuation Update (subscription required).

Michael Gregory (Michael Gregory Consulting) will conduct a webinar on August 4, and he will discuss the job aid and what it might mean for business valuers reviewing reasonable compensation issues while providing valuations for federal tax purposes.

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