Don’t assume that the IRS knows what you’re doing on your tax return because changes in accounting methods aren’t always clearly defined, according to an auditing expert.
Eric P. Wallace, a sole practitioner who has written tax guides for CCH, says that accountants should be aware of the things that are done, “whether they’re right or not.” Doing so would also protect other accounting and tax professionals, he added.
“There is no way for the IRS [to say], ‘Okay, you are a C corporation, you’re over $5 million and you’re reporting on the cash method.’ The IRS still doesn’t have you identified, if you can believe that. They just don’t,” Wallace said, in his session, Key Tax Accounting Method Procedures and Developments: The Toughest Tax Subject, at CCH Connections: User Conference 2017 in San Francisco on Tuesday.
In his presentation Wallace –– who also serves as an advisor to contractors, home builders, and property managers and developers –– addressed some key issues:
Beyond required method changes, tax practitioners should also adapt client tax methods to the ones that provide the best possible deferrals.
All industries have to comply with tax method change basics, i.e. the rules and procedures.
Certain industries have very specialized tax method alternatives that are confusing and prone to mistakes in their employment.
Other common tax method changes have applicability across all industries
Understanding method changes takes knowledge of what is allowed and permitted compared to what is not, in addition to those tax methods that provide the greatest potential tax deferrals.
He also pointed out that the change of accounting methods is a difficult subject, as one must understand:
The rules of the automatic and advance consent revenue procedures (and these change just about annually)
What an improper accounting method is (there is no list of all “proper” methods, just “automatic” ones...
What a potentially proper method is,
What methods will or will not be accepted
The “art” of filing the proper forms and documents (i.e. what forms to complete and attach, how to complete them, where to mail or attach them), and
How to deal with the National Office (DC) (including the Branch assigned) of the IRS that handles the specific method in question.
Throughout his talk, Wallace offered various examples on dealing with changes, such as whether a manufacturer was doing a particular accounting method properly while working on a tax return.
The IRS evolves, yet there are accounting changes that go unannounced and are unique to understand for a CPA’s client and for the accounting profession in general, he said.