Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

double extension and the index method, the current inflation is derived by dividing the Base Year
Cost into the Current Cost and subtracting the cumulative index for the prior year. As for the link
chain method the current inflation is derived by taking the Current Cost and dividing by the
Beginning of Year Cost.
Foundation Principles
IRC section 472(a), in substance, authorizes a taxpayer to elect the LIFO method, provided the
method clearly reflects income. A method clearly reflects income only if the method conforms to
the regulations prescribed by the Secretary of the Treasury. The LIFO regulations are legislative
and carry the full force of law.
To further enhance our understanding, it would be useful to provide a general background of how
the LIFO rules are arranged in the regulations. There are eight applicable subparagraphs:
Treas. Reg. section 1.472-1, authorizes the use of the LIFO method and provides general rules for
the use of the specific goods method.
Treas. Reg. section 1.472-2, sets forth the requirements incident to the adoption and use of LIFO.
A taxpayer adopting LIFO must file an application and specify with "particularity" the goods to
which LIFO is to apply. The cost of goods in ending inventories over those in beginning
inventories must be valued at a cost that is, at the option of the taxpayer, the most recent,
average, or latest acquisition cost. Inventories valued at LIFO must be reported in the same
manner for financial purposes. This last rule is frequently referred to as the "conformity
requirement."
Treas. Reg. section 1.472-3 provides instructions on the time and manner of making the election.
A taxpayer must attach a completed Form 970 or equivalent statement to the tax return for the
first year LIFO is adopted. Form 970 provides the Service with detailed information about the
LIFO method adopted by the taxpayer. The regulation states that the taxpayer’s application to
use LIFO is subject to the Commissioner’s approval upon examination of the taxpayer’s tax return.
Audit adjustments are subject to the appellate process.
Treas. Reg. section 1.472-4 states that the taxpayer in electing LIFO agrees to any audit
adjustments that the District Director might require in order to have the taxpayer’s LIFO method
clearly reflect income.
Treas. Reg. section 1.472-5 stipulates that the LIFO election is irrevocable unless written
permission is secured from the Commissioner.
Treas. Reg. section 1.472-6 provides the inventory methodology a taxpayer must use if
permission is received to discontinue the use of LIFO or if the IRS terminates the LIFO election
for failure to conform with the LIFO regulations.
Treas. Reg. section 1.472-7 provides cross-references for valuing LIFO inventories of an
acquiring corporation. The language in this regulation is identical to the language in Treas. Reg.
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