Examining the Method of Accounting and the IRS’s Broad Discretion to Change Them
The Practical Limits of IRC § 446(a) A taxpayer must compute taxable income under the method of accounting it regularly uses in keeping its books.[1] The IRS has rather broad statutory discretion to change a taxpayer’s accounting method in certain circumstances.[2] If the method of accounting used by the taxpayer does not clearly reflect income, the IRS generally will see fit to change the taxpayer’s method of accounting to a method that, in its not so humble collective administrative opinion, more clearly reflects income.[3] The IRS’s discretion in deciding whether to consent to a change of accounting method, though not limitless, has the breadth and girth of the average waistline of a Golden Corral patron.[4] The IRS’s determination with respect to a change in accounting methods may be challenged only upon a showing of abuse of discretion, which, in turn, depends upon whether the IRS’s determination is without sound basis…
