INTRODUCTION

Because inventory adjustments have been consistently made in the auto body/repair industry, the examiner will find it necessary to become acquainted with procedures for making a change in accounting method. For a taxpayer on the accrual basis, the change will be limited to the inventory itself. For a cash basis taxpayer, the change in accounting method will include the sales and purchases, as well. With the advent of Revenue Procedure 92-20, the examiner must also consider the possibility of allowing the taxpayer to spread the adjustment over several years.

WHY MAKE AN IRC SECTION 481 ADJUSTMENT

IRC section 481 was established to prevent amounts from being duplicated or omitted when a change in accounting method was made. In normal situations where the taxpayer makes a change voluntarily by filing a Form

3115, he is allowed to spread any increase in taxable income over a number of years to avoid a distortion of income. In an audit situation, the taxpayer’s options may be limited or curtailed altogether depending upon the type of adjustment made. In both cases, the IRC section 481 adjustment must be segregated from what is termed the “current year” adjustment to allow for potentially different treatment.

INVENTORY ADJUSTMENT

When a determination has been made that inventory must be established as part of cost of sales to more clearly reflect income, consistency dictates that the computation include both the beginning and ending inventory amounts. This consistency requirement gives rise to two separate tax adjustments. One is termed the "current year adjustment." The other is considered the IRC section 481(a) adjustment. The differentiation must be made because each may be taxed differently depending upon the available options allowed by the Code, regulations, and Revenue Procedures.

The computation of the actual inventory amounts is discussed in the "Cost of Sales" section. As mentioned before, an examiner would utilize the various repair

8-1

Back Continue

Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Glossary