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IRS Targets Distributors for Accounting Switch
IMR, Feb. 10, 1997
Distributors using a cash basis for their accounting cycles could receive a call from the Internal Revenue Service telling them they must switch to an accrual basis. The IRS contacted William Mann, CFC, about the switch in December. After meeting with the IRS and crunching numbers with his accountant, Mann, executive vice president of Xpert Printing Services, a distributorship in Kennett Square, Pa., is trying to persuade the IRS to drop its claim.
According to Mann, the IRS contends that distributors who buy products from manufacturers to resell to end users possess inventory at some point. If you possess inventory, you cannot use a cash basis accounting method. Mann initially argued that his business didn't possess inventory because it did not store products in a warehouse. However, he was told that physical possession of the goods wasn't necessary to be classified as inventory. "The IRS is claiming that this has always been on the books," he says, "and they've decided to enforce it now."
It's hard for some distributors to understand the IRS' inventory claim because the amount of time distributors own title to the goods is almost immeasurable. According to DMIA's freight consultant, Ray Bohman, of Bohman Industrial Traffic Consultants, the instant a freight driver signs for a job at a printing manufacturer's dock, the title passes from the printer to the distributor. However, the distributor's terms of sale with the customer kick in simultaneously. "If you blink, it's over," says Mann.
After meeting with the IRS, Mann originally planned to make the switch because he thought he would receive a tax refund. After talking with his accountant again, however, he discovered his refund would be more substantial by remaining on a cash basis. An agent told him the IRS wouldn't force him to switch if he could get manufacturers of more than 75 percent of his purchases to write letters saying Xpert Printing never has possession or won't be liable for the products.
While making the switch shouldn't be costly for some distributorships, Mann recently talked with an accountant for a distributor who could lose up to $100,000 if forced to switch. That distributor was also contacted by the IRS. Mann also warns that distributors who don't respond in a specified time after being contacted by the IRS could face major penalties.
Mann's accountant, Lisa Angst Long, CPA, from Lisa Angst Long P.C. in West Grove, Pa., says distributors currently on a cash basis have two main options. They can pay a filing fee and switch to an accrual basis on their own, or they can wait to see if the IRS contacts them. Distributors contacted by the IRS are more likely to face an audit of some kind, Long says.