Tax calculator and penA recently issued IRS revenue procedure has resulted in uncertainty for some taxpayers seeking to change methods of accounting, according to the AICPA.  In a letter dated June 8, the organization made recommendations to the IRS regarding accounting method changes for erroneously characterized research and experimentation (R&E) expenditures.  Taxpayers sometimes wrongly attribute an expense to R&E activities or alternatively mischaracterize what is actually an R&E expenditure as a capital or inventoriable expenditure.

While certain changes in a taxpayer’s method of accounting require IRS consent, automatic changes do not.  In January, the IRS issued Rev. Proc. 2015-14, which listed various automatic changes in accounting method.  Prior to Rev. Proc. 2015-14, taxpayers who had wrongly characterized R&E expenditures could correct their mistakes by either filing an amended return or an automatic change of accounting method under Appendix §7.01 of Rev. Proc. 2011-14.  However, the AICPA argues that in the wake of Rev. Proc. 2015-14, it is unclear whether Appendix §7.01 applies to changes to the method of accounting for inventoriable or capital amounts that were wrongly classified as R&E expenses.  The AICPA believes that taxpayers need further guidance about how to handle such mischaracterizations.

Recommendations made in the AICPA’s letter included:

  • Bring the project regarding accounting method changes for R&E expenses to the forefront by adding it to the Treasury Department and IRS’s Guidance Priority List for 2015-16.
  • Add a new appendix section to Rev. Proc. 2015-14 to clarify that the automatic method change procedures do apply to amounts characterized as R&E expenditures that should have been characterized as inventoriable or capital expenditures, and vice versa.  Such method changes should be accompanied by a §481(a) adjustment and receive audit protection.  The AICPA believes that it is in the IRS’s best interest to offer audit protection because doing so will provide taxpayers an incentive to voluntarily rectify their past errors.

As demonstrated by the issues raised by Rev. Proc. 2015-14, the field of tax law is a confusing realm for many businesses and individuals.  At Capital Review Group (CRG), we make it our business to stay current on the latest developments in order to help you navigate the complexities of tax law and capture maximum savings.