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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 307
Experience:  Tax Accountant at Praxair, Inc.
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Customer Question

JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: A physical inventory was never taken & % of cost was used. This exagerated the ending inventory. If it is corrected in 1 year a large loss is shown (audit??)
JA: Is there anything else the Accountant should be aware of?
Customer: The entity is in Hispanic grocery. Can the inventory be adjusted in more than one year?
Submitted: 26 days ago.
Category: Tax
Expert:  Jonathan Tierney replied 26 days ago.

Changing the way of determining ending inventory is an accounting method change that would require filing Form 3115 found here both with the tax return and separately with the Ogden, UT service center. It is easiest to apply for an automatic change of accounting method, a list them is included in the instructions to Form 3115 Each automatic change has a DCN number associated with it to the tell the IRS what type of change the taxpayer is making. The ones the seem the closest to your situation is DCN 54 described on page 15 of the instructions and DCN 204 described on page 22, though they do not seem to fit exactly. When an accounting method change is made an IRC 481(a) adjustment is made in the year the change is taking place which takes into account the cumulative change for all prior years and is shown as a separate line item on the tax return and Form 3115.

As an alternative to doing an accounting method change, you could file amended return return if all tax years are open that this situation occurred and spread the adjustment over several years arguing that by amending the returns you have always had a correct method, however I believe the Form 3115 method and reporting the change in the current year is the most technically correct method. You sound worried about an audit but it sounds like the IRS could not really come in to the store and find that it has much more inventory than it says currently, and they will be happy that you will be doing an inventory going forward.

I hope this answers your question. Please let me know if I can clarify anything or answer any additional questions.

Thanks, Jonathan