A failure of a major of the tests would be a sign of trouble, particular the tests of external comparison and non-mathematically based salary or bonus determinations. The courts seem to have consistently examined these two critical areas. The five tests mentioned are now however, the only factors to consider. The existence of any loans between the highly compensated individual and the company. Again, no one test is usually definitive in a challenge by the Internal Revenue Service.
Documentation can be a helpful defense.
With thorough documentation, compensation will seem less arbitrary and therefore reasonable. As mentioned earlier, the company should document its compensation policies. In truth, all policies should be documented as well, such as employee qualifications, dividend policies, and various other forms of compensation like pension, sick pay, etc. Policies stated not only in the company's minutes are important, but also in the accounting records. In short, the more documentation the better to justify a company position.