S-Corporation Compensation vs. Flow-Through Income

[Ben Skove]

After meeting with my CPA today, and going through a number of back posts from the BP forums, I'm interested in hearing more about how the IRS oversees the balance between S-Corporation compensation versus flow-through shareholder income.

Perusing the IRS information, they state:

It seems to me that if you use a S-corp, pay yourself only a small salary, and are very actively involved in your flips, the IRS can step in and reclassify most of your pass-through as wages. My CPA didn't seem to think this was much of a problem, and stated that it was very seldom that he'd seen this occur. I'd much rather be conservative and avoid potential (and costly) pitfalls down the road.

While the rule seems to be plain, I'd like to know how it's actually implemented in real life. Has anyone had this happen to them?