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AICPA Makes Suggestions to IRS on Certain Accounting Method Changes

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Jun 10th 2015
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In a June 8 letter to the IRS, the American Institute of CPAs (AICPA) recommended a new approach that will allow taxpayers making accounting method changes for mischaracterized research and experimental (R&E) expenditures to clearly reflect taxable income and reduce complexity and future controversy in this area.

The AICPA believes that taxpayers seeking to correct mischaracterizations of R&E expenditures under Section 174 of the tax code “should treat such corrections as accounting method changes effected with a Section 481(a) adjustment,” wrote Troy Lewis, CPA, chair of the AICPA Tax Executive Committee. “We also believe taxpayers should receive audit protection incident to the filing of a method change request to correct the mischaracterization of R&E expenditures incurred in taxable years prior to the year of change.”

The AICPA explained that the current administrative framework provided to a taxpayer – who either has mischaracterized an expenditure as an R&E expenditure or has mischaracterized an R&E expenditure as a capital expenditure or an inventoriable expenditure and wishes to correct such mischaracterization – is inconsistent and confusing. Prior to Revenue Procedure 2015-14 being issued, a taxpayer who had mischaracterized R&E expenditures as either a capital expenditure or an inventoriable cost, or vice versa, could effectuate such correction either by:

  • Filing an amended tax return for the taxable year in which the mischaracterization occurred (assuming such taxable year is not barred by the statute of limitations).
  • Filing an automatic accounting method change under Appendix Section 7.01 of Revenue Procedure 2011-14 to correct such mischaracterization prospectively using cut-off transition procedures.

In the letter, the AICPA said it is unclear whether Appendix Section 7.01 applies to method changes for amounts characterized as R&E expenditures that should have instead been capitalized or inventoried, and how the IRS expects taxpayers to effectuate such mischaracterizations.

To reduce future controversy in this area, the AICPA offered the following three recommendations:

  1. Add to the US Treasury Department and IRS Priority Guidance Plan for 2015-16 the project regarding procedures for changing methods of accounting for R&E expenditures.
  2. Modify Revenue Procedure 2015-14 to add a new Appendix Section 7.02 to clarify that the automatic procedures apply to corrections of expenditures mischaracterized as R&E expenditures that should have instead been capitalized or inventoried, in addition to corrections for expenditures, capitalized or inventoried, that should have been characterized as R&E expenditures. Method changes to correct such mischaracterizations should be implemented with a Section 481(a) adjustment and receive audit protection.
  3. Provide in the new Appendix Section 7.02 for accounting method changes to comply with the 2014 final pilot model regulations under Section 174.

These changes likewise should enable taxpayers to make the method changes with a Section 481(a) adjustment and receive audit protection, according to the AICPA.

The AICPA also recommended that to the extent taxpayers may make accounting method changes for mischaracterized R&E expenditures with a Section 481(a) adjustment, they should receive audit protection for prior years. This suggestion, the AICPA wrote, is in the IRS’s interest because taxpayers changing from a method where R&E expenditures have been improperly capitalized or included in inventory would have an economic incentive to voluntarily fix their prior erroneous method.

Related article:

AICPA Sends IRS Tax-Related Recommendations for Priority Guidance Plan

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