A doctor pays his children $100,000 each year for “consulting services”. The IRS plans to disallow that amount as a deduction on the doctor’s business tax return (Form 1120). The children reported the income they received as wage income. However, the income is taxed at a relatively modest marginal income tax rate. Are there any steps that should be taken to protect the doctor and his children?

a. Nothing at this time. Plan to vigorously contest the deduction disallowance.

b. Extend the statute of limitations on assessment of the Form 1120, thus delaying any action on the children’s tax returns.

c. File Form 1040X on behalf of the children making a protective refund claim of the income tax the children paid. Also request a refund of any employment tax.

d. File an amended Form 1120X protecting the parties and reallocating the payments to the children as a loan to the doctor/shareholder.

Answer rating: 100% (QA)

D is the correct answer File an amended Form 1120X protecting the parties and ... View the full answer