Accumulated earnings tax is 39.6% of your clients companys taxable income. This means they lose almost 40% of their earnings when the company makes more money. This occurs to businesses that have tried to shield their earnings from the IRS and somewhere along the way they made a mistake. All it takes is one mistake for Uncle Sam to slap your client with the accumulated earnings tax. According to the IRS, "if a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of 39.6%." Following are some legitimate reasons that IRS might consider not imposing accumulated earnings tax on your client:
If the company can show bona fide business reasons for accumulation of earnings, which exist not to benefit them but the stockholders and improvement of facilities and services, the IRS wont come after your client with the accumulated earnings tax. But anytime any of the above reasons are not met and a liability for the accumulated earnings tax is established your client will get a notice in the mail from Uncle Sam asking for his 40%, in which case they have thirty days to respond.