I am an auditor and I sometimes run into this issue.

In Year 1 the S-Corp shareholder/officer had reasonable wages and at the end of the year the corporation retained earnings.

In Year 2 the S-Corp officer does not have what I consider to be reasonable wages and the officer received a distribution from the Retained Earnings account.

My original thought was that at least part of the distribution would have to be reclassified as wages since the IRS calls for reasonable wages before distributions.

I have had several CPAs who disagree and argue that previous year(s)retained earnings can't be treated as wages b/c this would be tantamount to double taxation. Once when it passed through to the shareholder/officer in Year 1 and then again when it was treated as W2 wages in Year 2.

Any insight would be greatly appreciated.