orders and invoices to compute the inventory amounts.

There would be a difference in the computational method

in regards to either the beginning or ending inventory.

After the computation of the beginning and ending inventories for a particular year, the current yea adjustment is determined by simply taking the difference between the original and revised cost of sales amounts. This adjustment can be either negative or positive depending upon which increase (beginning or ending inventory) is larger.

The IRC section 481(a) adjustment is the increase or decrease in the beginning inventory for the year of change. The following presents an example.

Example 1

An adjustment is proposed to an accrual basis auto

body shop which had never previously maintained

inventories. The year of audit is the calendar

year 1990 and the entity is a corporation. The

beginning inventory has been computed at $30,000

and the ending inventory has been computed at

$40,000.

Per Return Revised Difference Treatment

Begin. Inventory @ 1/1/90: 0 30,000 30,000 IRC 481(a)

Purchase 600,000 600,000 0

Labor 600,000 600,000 0

Ending Inventory @ 12/31/90: 0 (40,000) (40,000)

--------- --------- ----------

1,200,000 1,190,000 (10,000) Current

========== ========= ========= Yr. Adj.

Since the cost of sales has been decreased, a positive tax adjustment of $10,000 is proposed for the 1990 year. Because the taxpayer has been given credit for the $30,000 beginning year adjustment, to prevent an omission of income, the $30,000 will be considered the IRC section 481(a) adjustment.

It should be noted that for the Service to be consistent in its position, the subsequent years should be audited (with group manager's approval) and adjustments proposed for the same issue. The subsequent year's adjustments will be considered current year adjustments and will be taxed in the respective years.

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