The IRS has released an Audit Techniques Guide (ATG) that addresses whether an expense should be considered a currently deductible repair or is required to be capitalized under current law. This latest ATG is important for taxpayers in two respects: first, it provides insight into how examiners will review a taxpayer’s change in accounting method (CAM) request dealing with the recharacterization of previously capitalized expenses as currently deductible.
Secondly, the IRS has recently designated – in several Industry Directives – the capitalization versus repairs CAM issue as a Tier 1 issue. Tier I issues are of high strategic importance to the IRS.
ATGs provide examination techniques, common and unique industry issues, business practices, industry terminology and other information used by IRS examiners. However, ATGs are helpful to taxpayers since they essentially provide insight into the specific examination process and techniques used by examiners regarding the issue as well as what issues the examiner will be looking at when undertaking his or her examination or audit.
In the IRS’s new ATG, the agency presents detailed guidance to field agents examining a taxpayer’s capitalization versus repairs CAM. The ATG on capitalization versus repairs explains the steps that examiners would consider when reviewing and examining the issue of determining whether an expense is currently deductible or should be capitalized. The ATG discusses which taxpayer documents to request, instructs examiners on the manner in which to review taxpayer books and records in order to determine if the CAM is proper, and more.
The ATG also sets forth the steps that the IRS recommends agents taken when reviewing costs reclassified as repairs. According to the ATG, the facts and circumstances of each taxpayer’s case must be weighed closely when determining whether the CAM is appropriate.