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January 3, 2023
2023-0015

IRS limits audit protection for the treatment of specified research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021

In Revenue Procedure 2023-11, the IRS has modified Revenue Procedure 2023-8 to limit audit protection for the treatment of specified research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021. (For more information on procedures for automatically changing accounting methods to comply with amendments made to IRC Section 174 by the Tax Cuts and Jobs Act, see Tax Alert 2022-1910.)

Under Section 7.02 of Revenue Procedure 2022-14, as modified by Revenue Procedures 2023-8 and 2023-11, audit protection does not apply to the treatment of specified research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021, if the accounting method change is made for the tax year immediately following the first tax year in which amended IRC Section 174 is effective. As provided in Revenue Procedure 2023-8, taxpayers will not receive audit protection for the treatment of specified research or experimental expenditures paid or incurred in tax years before the first tax year in which amended IRC Section 174 is effective.

Implications

Limiting audit protection for automatic accounting method changes to comply with Tax Cuts and Jobs Act changes made to IRC Section 174 appears designed to encourage taxpayers to make the accounting method change for the 2022 tax year. Without audit protection, a taxpayer who waits until its 2023 tax year to make the accounting method change may risk the IRS implementing the method change and corresponding IRC Section 481(a) adjustment amount entirely in the taxpayer's 2022 tax year, along with any corresponding interest and penalties.

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Contact Information
For additional information concerning this Alert, please contact:
 
National Tax – Accounting Periods, Methods, and Credits
   • Alexa Claybon (alexa.claybon@ey.com)
   • Craig Frabotta (craig.frobatta@ey.com)
   • Rayth Myers (rayth.myers@ey.com)
   • Nicole Gresalfi (nicole.gresalfi@ey.com)

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor

 

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