Explain the tax consequences to both the corporation and a shareholder-employee if an IRS agent determines that a portion of the compensation paid in a prior tax year exceeds a reasonable compensation level.

A.

If the IRS determines a portion of the compensation paid is unreasonable, then the corporation loses its tax deduction for that portion of the payment. However, the shareholder-employee will then have a decrease in compensation for the current year and the amount will be treated as fringe benefits to them.

B.

If the IRS determines a portion of the compensation paid is unreasonable, then the corporation can still take its tax deduction for that portion of the payment. However, the shareholder-employee will still be liable for this amount on their personal return as compensation for the year.

C.

If the IRS determines a portion of the compensation paid is unreasonable, then the corporation can still take its tax deduction for that portion of the payment. The shareholder-employee will then have a decrease in compensation for the current year and the amount will be treated as fringe benefits to them.

D.

If the IRS determines a portion of the compensation paid is unreasonable, then the corporation loses its tax deduction for that portion of the payment. The shareholder-employee will still be liable for this amount on their personal return as compensation for the year