The IRS today posted an LB&I directive that provides guidance to IRS auditors with respect to taxpayer examinations concerning the repair vs. capitalization issue.
LB&I-4-0312-004 (March 15, 2012)
The LB&I directive instructs IRS examiners to discontinue current examinations and not to begin any new examinations concerning the repair vs. capitalization issue.
However, if the taxpayer has filed a Form 3115, Application for Change in Accounting Method, on or after December 23, 2011 (the date when the temporary “repair” regulations were released) for a tax year not
covered by the temporary regulations, the LB&I directive instructs IRS examiners to “risk assess” the Form 3115 and determine whether to examine it.
The LB&I directive sets out specific steps that examiners are to follow in discontinuing the audit of a repair vs. capitalization issue, and states that the following language is to be included in the form provided for signature by the taxpayer:
The Service neither accepts nor rejects the position taken in the tax return related to the method to determine the proper treatment of amounts incurred to repair tangible property. [Insert taxpayer name] will be allowed a two-year period to adopt the appropriate method of accounting provided in Rev. Proc. 2012-19 and 2012-20. If an appropriate method is adopted, a change in method of accounting can be made in accordance with Section 4 or 5 of the applicable revenue procedure for all assets. If [Insert taxpayer name] has not changed its accounting method consistent with Revenue Procedures 2012-19 and 2012-20 in its first or second taxable year beginning after December 31, 2011, then the repair expense will be subject to risk assessment and possible examination for tax years ending on or after January 1, 2012.
According to the LB&I directive, IRS examiners who begin examining a return for a tax year beginning on or after January 1, 2012, but before January 1, 2014,
- Determine if the taxpayer filed a Form 3115 in accordance with the applicable guidance
- If “yes,” perform a risk assessment regarding the method change
- If “no” and the waiver period to file such change is still open, do not examine the issues, but allow the taxpayer the appropriate time period to file a method change
- If “no,” and the waiver period to file such change has passed, perform a risk assessment regarding the issues
For tax years beginning on or after January 1, 2014, IRS examiners are directed to follow normal examination procedures.
In December 2011, temporary “repair” regulations were issued; for an overview, background discussion of the December 2011 “repair” temporary regulations, see:
Last week, the IRS released two revenue procedures—Rev. Proc. 2012-19 and Rev. Proc. 2012-20—to establish the procedural rules by which taxpayers can change methods of accounting to comply with temporary regulations issued in December 2011.
The two revenue procedures are effective for tax years beginning on or after January 1, 2012 (consistent with the temporary regulations), and they resolve several key transitional issues. To read a KPMG LLP report describing these issues and the guidance provided by this week’s revenue procedures, see
* * * * *
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Back to top