BobKamman
Level 15

Would have been better to start a new message thread for this, rather than reviving one from two years ago.  What you don't tell us is what they did with the $48K -- presumably, just paid it out to themselves?  

I would inform the clients that IRS audits 1 in every 358 S Corporation returns, and let them decide how much of the distributions were reasonable compensation, based on all of the facts and circumstances.  And, I would examine whether it could be reported on a 1099-NEC to them, rather than messing around with delinquent 941's.  Is there really an employer/employee relationship?