The IRS has posted an updated Large Business & Industry (LB&I) Directive for field examinations on the repair vs. capitalization issue that extends the suspension of examinations to tax years beginning on or after January 1, 2014. The IRS has also given its auditors modified examination instructions for tax years beginning on or after January 1, 2012, and before January 1, 2014, and restated its earlier examination instructions for tax years beginning before January 1, 2012, and on or after January 1, 2014.
For examinations of tax years beginning before January 1, 2012, agents are instructed to discontinue current exam activity and not begin any new activity as to the issue of:
• Whether costs incurred to maintain, replace, or improve tangible property must be capitalized; IRC Section 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 tax years beginning on or after January 1, 2012, and before January 1, 2014, if a taxpayer has changed its method of accounting under the repair regulations, with or without filing a Form 3115, Application for Change in Accounting Method, the agent must perform a risk assessment regarding the method change. If the taxpayer has not changed its accounting method, the “option period” (the period before the applicability dates of the forthcoming final regulations, during which a taxpayer may choose to apply the temporary regulations) is still open and the agent is instructed not to examine the issue.
For tax years beginning before January 1, 2012, agents should:
1. Withdraw the portions of Forms 4564, Information Document Request, that relate to the development of these issues.
2. Withdraw all Forms 5701, Notice of Proposed Adjustment, related to these issues.
3. Issue a new Form 5701 with a Form 886-A, Explanation of Adjustments,.
4. Complete Form 5346, Examination Information Report.
For tax years beginning after Dec. 31, 2013, agents must follow the regulations in effect and follow normal procedures.
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