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IRS Suspends Repair/Capitalization Exams Pending Accounting Method Changes - Emil Estafanous, CPA : Emil Estafanous, CPA

IRS Suspends Repair/Capitalization Exams Pending Accounting Method Changes


On Mar 15, a IRS released a Large Business Industry (LBI) Directive for margin examinations on a correct vs. capitalization emanate that radically dangling stream examinations so as to assent taxpayers to record accounting process changes underneath just-issued income procedures (LBI-4-0312-004).

Taxpayers that are theme to a new proxy regulations in T.D. 9564 are compulsory to record for involuntary changes in accounting methods underneath Rev. Procs. 2012-19 and 2012-20 for taxation years commencement after Dec. 31, 2011. The IRS records that a income procedures relinquish a range stipulations of Rev. Proc. 2011-14, Section 4.02, for a ask to change a process of accounting, that routinely request to a taxpayer underneath examination, for taxpayers’ initial or second taxation year commencement after Dec. 31, 2011.

For examinations of taxation years commencement before Jan. 1, 2012, examiners are educated to pause stream examination activity and not start any new activity with courtesy to a “issues,” that are discernible as:

  • Whether costs incurred to maintain, replace, or urge discernible skill contingency be capitalized underneath Sec. 263(a); and

  • Any correlative issues involving a showing of constructional components of a building or dispositions of discernible depreciable resources (other than a building or a constructional components).

The IRS cautions that, if a taxpayer files a Form 3115, Application for Change in Accounting Method, with courtesy to a issues on or after Dec. 23, 2011 (the date a proxy regulations were issued), for a taxation year not lonesome by a proxy regulations, examiners contingency determine, in conference with a accounting process change emanate group, either to inspect a form.

In addition, for taxation years commencement before Jan. 1, 2012, examiners are told to:

  1. Withdraw a portions of Forms 4564, Information Document Request, that describe to a growth of these issues.
  2. Withdraw all Forms 5701, Notice of Proposed Adjustment, associated to these issues. 
  3. Issue a new Form 5701 with a Form 886-A, Explanation of Adjustments, with denunciation specified in a directive, a hint of that is that a IRS does not accept or reject a position a taxpayer took in a lapse on these issues; a taxpayer has a two-year duration to adopt a suitable process of accounting underneath a newly released income procedures; if a taxpayer does not adopt a new process within that time, a taxpayer might be theme to examination for taxation years finale after Dec. 31, 2011, going forward. A duplicate of this form sealed by a taxpayer contingency be uploaded into a IRS’s information government complement (IMS). 
  4. Retain workpapers on these issues in a IMS. 
  5. Complete Form 5426, Examination Information Report.

For taxation years commencement after Dec. 31, 2011, and before Jan. 1, 2014, examiners should establish either a taxpayer filed Form 3115. If a taxpayer did, a investigator should perform a “risk assessment” to establish either to inspect a form. If a taxpayer did not record Form 3115, and a duration is still open, a investigator contingency wait until a duration is closed; if a duration is sealed in that a taxpayer should have filed, a investigator contingency make a “risk assessment” about a issues.

As partial of a risk comment for any Sec. 481(a) composition ensuing from a change, a investigator should:

  1. Consider if a composition scrupulously accounts for amounts paid that were computed underneath a taxpayer’s before process and formerly deducted; 
  2. Determine if a Sec. 481(a) composition ensuing from any before year change was taken into account; and 
  3. Consider a correctness of a Sec. 481(a) adjustment.

For taxation years commencement after Dec. 31, 2013, examiners contingency follow a regulations in outcome and follow normal procedures.


About Emil Estafanous, CPA
Certified Public Accountant (CPA) Tax Professional committed in representing taxpayers and resolving their tax problems.

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