IRS suspends repair/capitalization exams

July 1, 2012

In March, in a Large Business & Industry (LB&I) Directive (LB&I-4-0312-004), the IRS suspended current field examinations on the repair vs. capitalization issue to permit taxpayers to file accounting method changes under recently issued temporary regulations and revenue procedures.

Taxpayers that are subject to the temporary regulations (T.D. 9564; see Tax Matters coverage March 2012, page 59) are required to file for automatic changes in accounting methods under Rev. Procs. 2012-19 and 2012-20 for tax years beginning after Dec. 31, 2011. The IRS notes in the directive that the revenue procedures waive the scope limitations of Rev. Proc. 2011-14, Section 4.02, for a request to change a method of accounting, which normally apply to a taxpayer under examination, for taxpayers’ first or second tax year beginning after Dec. 31, 2011.
 
The directive applies to the exam activity relating to positions taken on original returns relating to the issues of whether costs incurred to maintain, replace, or improve tangible property must be capitalized under Sec. 263(a) and any correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components). For examinations of tax years beginning before Jan. 1, 2012, examiners are instructed to discontinue current exam activity and not begin any new activity with regard to these issues. The IRS cautions that if a taxpayer files a Form 3115, Application for Change in Accounting Method, with regard to the issues on or after Dec. 23, 2011 (the date the temporary regulations were issued), for a tax year not covered by the temporary regulations, examiners must determine, in consultation with the Change in Accounting Method Issue Practice Group, whether to examine the form.

In addition, for tax years beginning before Jan. 1, 2012, examiners are told to withdraw all Forms 5701, Notice of Proposed Adjustment, that relate to the development of these issues, as well as relevant portions of Forms 4564, Information Document Request, and to take other remedial actions.

For tax years beginning after Dec. 31, 2011, and before Jan. 1, 2014, examiners should determine whether the taxpayer filed Form 3115. If the taxpayer did, the examiner should perform a “risk assessment” to determine whether to examine the form. If the taxpayer did not file Form 3115, and the period is still open, the examiner must wait until the period is closed; if the period is closed in which the taxpayer should have filed, the examiner must make a “risk assessment” about the issues.

For tax years beginning after Dec. 31, 2013, examiners must follow the regulations in effect and follow normal exam procedures.

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