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Opportunity ... or trap?

How the Service's "amnesty" available for taxpayers with aggressive LIFO methods will affect specific clients depends on their own LIFO calculation method, the LIFO tax benefits accumulated in the past, and their aversion to IRS audit risk.

Talk of amnesty generally refers to a taxpayer's ability to lock in cumulative LIFO tax benefits prior to a year in which it agrees to prospectively apply any IRS-mandated LIFO calculation method. The agreement with the Service would be initiated by filing an application for change in accounting method (Form 3115) pursuant to the rules of Rev. Proc. 92-20, issued in March 1992.

As the flowchart on page 614 indicates, the year of change to an IRS-mandated method, as well as the availability of amnesty for prior years' LIFO tax benefits, is determined by the date Form 3115 is filed, and whether the taxpayer is under audit at the time of filing. It is important to keep in mind than without amnesty, prior years' LIFO calculations may have to be reworked to the satisfaction of an IRS agent, and any resultant understatement of income will be taxed over a period of one to six years. Penalties may also be imposed when amnesty is not available, except for a limited period at the beginning of the audit.

Therefore, while some taxpayers may not want to come forward and make a change in their LIFO calculation method that is unpalatable, others may view the risk of an IRS audit-imposed change (that could effectively include substantial give-backs of their prior years' LIFO tax benefits) as the lesser of two evils.

Planning tip: Practitioners and their clients should be proactive and not panic. The current LIFO method should be reviewed now and exposure assessed. The method may be reasonable and not require adjustment to satisfy the Service.
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Article Details
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Title Annotation:IRS amnesty program
Author:Lazzaro, Lynn M.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Sep 1, 1992
Previous Article:It's a jungle out there: survival techniques.
Next Article:Due date control: a case for continuous improvement.

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