IRS attack on service firms using cash accounting.

Kiplinger Tax Letter, The, April, 1997

An IRS attack on service firms using cash accounting backfires. IRS believes the cash accounting method gives firms too much tax leeway... delaying billings to defer income and paying expenses first. IRS insists use of cash method is improper...requires firms to use the accrual method. Tax pros say this is popping up more often on audits of service companies.

The Service has to pay for an attack on a small employment agency that used cash method. Company did not prepay unreasonably for supplies or other expenses. Nevertheless, the Service required accrual accounting.

Cash method of accounting is legal, Tax Court says. The company didn't abuse prepayments. IRS was arbitrary (Austin, TC Memo. 1997-157). Nor did the firm have inventory, for which...

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