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Old 07-31-2014, 10:10 AM
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Change in accounting method help

I need some help! We just picked up a new client from a bigger CPA firm here in town and they have been filing under the wrong method of accounting. Some details are below:

1) S corp
2) Product: reseller of glasswares/bongs/cylinders/etc (NAICS code of 45-)
3) Business started in 2009
4) Filed under cash basis of accounting from inception (really using a hybrid method because they track inventory)
5) I don't see an accrual to cash adjustment on their 2013 tax return. On the BS, they list AR and AP
6) Gross receipts from 2010-2013 are all over $1 million. Don't have a copy of the 2009 return

Based on these facts, they do not qualify for the cash method of accounting under the 2001 and 2002 Rev Procs.

It is apparent that they have been using the wrong accounting method since 2010. I believe we have two options:

A) Should the statue still be open for 2010, go back and amend 2010-2013 because of the error. My thoughts are that even though we would be amending for a change in method, the original method was an error, so filing a 3115 should not be needed. I think this is the correct way to approach it, or

B) File a 3115 for the 2014 tax year and take the ending balances of AR and AP as of 12/31/13 into the 481(a) adjustment since they have never done an accrual to cash adjustment. Thankfully a change from cash to accrual is an automatic change

That's basically the jist of it. In my research, I cannot find anything that points, or speaks to, option A (and maybe that is because it is wrong), but it seems to me that the 2010 return was in error. Since 2009 was the original year, I bet it is safe to assume that gross receipts that year were less than a million, so the cash basis was appropriate (and might have been ok for 2010 if receipts were low enough in 2009 so that the average would not crest the $1M threshold....same goes for 2011).

Any help with this matter would be greatly appreciated!

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