If you’re an S-Corp owner, pay attention. The IRS is concerned about wages being reasonable because of the payroll tax component. If an S-Corp owner is running an artificially low wage, they are avoiding payroll taxes and are instead taking the majority of their profits through distributions.

The Economic Substance Doctrine is a nifty-little tool the IRS has to disallow certain tax transactions based on intent over form. In those instances, they say those transactions lack “economic substance” and are down purely as a tax-avoidance scheme with no other purpose.

As of the summer of 2023, 63% of new audits have been for individuals making $200k or less, with 80% of overall audits are for taxpayers making $1M or less. So much for allocating resources to the ultra-wealthy.