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AICPA Joins Auto Dealers’ Request for Inventory Relief

Posted on Apr. 30, 2021

The IRS should exercise its discretion to provide relief to taxpayers with potential surprise income arising out of inventory replacement difficulties induced by foreign trade disruption, according to the American Institute of CPAs.

Congress enacted section 473 to provide relief to taxpayers in circumstances such as these,” the AICPA asserted in its April 27 letter to the IRS and Treasury.

Government responses to the COVID-19 pandemic across the world have inhibited manufacturing and disrupted global supply chains, the letter noted. That has left some U.S. taxpayers unable to replenish their last-in, first-out inventories to prior levels, which means some of their LIFO layers will be liquidated under their inventory accounting methods, according to the letter.

The global pandemic should certainly satisfy the definition of an involuntary liquidation under section 473, the AICPA argued.

Section 473 allows taxpayers to avoid income caused by falling LIFO inventory levels if those levels recover during a “replacement year.” However, the Treasury secretary has to publish a notice invoking the provision in the Federal Register for it to apply.

The AICPA noted that it isn’t making the first request for a section 473 notice: The National Automobile Dealers Association sent a similar letter in November 2020.

The Cure

Pandemic trade disruptions have “made it difficult, and in some cases impossible, for taxpayers to maintain inventories at normal levels, resulting in an involuntary liquidation of LIFO layers for taxpayers that use the LIFO method to account for inventories,” according to the AICPA.

Treasury and the IRS should respond first with a section 473 notice allowing taxpayers to irrevocably elect that relief for tax years ending between March 31, 2020, and June 30, 2021, and should include a three-tax-year replacement period, the AICPA said. The sooner that notice is published, the better, it said.

Later, the IRS and Treasury should follow up with guidance on a safe harbor method for taxpayers making the section 473 election, the AICPA said. The safe harbor method would allow taxpayers to ignore the changing inventory levels completely if those levels are fully replenished by the end of the replacement period.

Taxpayers that haven’t yet filed tax returns for the liquidation relief period should be allowed to simply attach an election statement to a timely original tax return for the relevant tax year, and those that have already filed should be able to choose between amending their 2020 tax returns (or filing administrative adjustment requests for partnerships) or attaching Form 3115, “Application for Change in Accounting Method,” to their 2021 tax returns, according to the letter.

The AICPA said it’s working on another letter to further elaborate on the requested safe harbor guidance and will include examples.

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