The Internal Revenue Service Sept. 15 issued a new directive for how auditors should handle reviews of contractors using the completed contract method (CCM) of accounting that ignores its own
proposed regulations. The CCM allows contractors to report profits at the end of a project when profits are known and payments are more likely to have been received, instead of relying on estimates.
The
recent IRS directive supersedes a 2007 directive that required auditors to evaluate compliance with the CCM whenever that method is utilized by the taxpayer being audited. The September directive acknowledges the proposed regulations but explicitly tells auditors to ignore the proposed rule, which was issued at ABC’s request under the IRS Industry Resolution program in 2008. Currently, only contractors and subcontractors working on projects for which the owners meet a narrow IRS definition of “homebuilder” can use CCM.
“While ABC is typically not involved in homebuilder issues, in this case, the IRS is attacking a legal tax method used by ABC’s subcontractor members because of concerns with other taxpayers,” said Rich Shavell, president of Shavell & Company and a member of ABC’s Tax Advisory Group who submitted comments and testimony on the proposed rule. “Unfortunately, if left unchecked, the IRS could damage the availability of the completed contract method that is used by those members.”
In the proposed rule, the IRS created a distinction between homebuilders and “land developers,” who would own and sell land but not participate in the construction. The new rule would remove the necessity for subcontractors to know how the owner was structured to determine if the completed contract method was available for them to use.
After the proposed rule was introduced, ABC
testified that contractors should be allowed to rely on the clearer guidelines until the rule is enacted, which will be one year after the date of finalization. The September directive does not take that testimony into account and the IRS has delayed the proposed rule, arguing that the changes are an expansion of CCM and not just a clarification.
ABC is reviewing next steps in the process for finalizing the proposed regulations and having the IRS retract that portion of the September directive that countermands the proposed regulations.
For more information, contact Rich Shavell, CPA, CVA, CCIFP at Shavell & Company, P.A.
rich@shavell.net.