In May 2009, the Internal Revenue Service updated its Construction Industry Audit Technique Guide (ATG). ATGs are one of many tools used by IRS field agents to understand specific industries and assist them in the audit of taxpayers. It is apparent that the IRS sees the construction industry as one of its primary targets in the quest to ensure taxpayer compliance and the proper reporting of income.
As a Construction Financial Manager (CFM), it is important to understand when and why to use the ATG:
- During the current taxable year - to confirm the proper reporting of transactions and the correct handling of the intricacies of construction tax accounting
- In preparation for and during an IRS exam - CFMs and construction business owners should be aware of the resources available to examining agents and the potential issues to be addressed as part of the audit
What does the Construction ATG Address?
The May 2009 revision included numerous updates from the previous version on the following technical issues:
- Contract clauses - specifics related to revenue reporting on an accrual basis and "pay-if-paid" and "pay-when-paid" contract clauses
- Rules for large contractors - deals with the cost-to-cost computation, details related to the allocation of direct and indirect costs to contracts, and nondeductible costs not permitted to be allocated to contracts
- Percentage-of-Completion/Capitalized-Cost Method - explains the rules and calculations of the method of accounting as described in Treas. Reg. §1.460-4
- The Look-Back Method - discusses the rules under Treas. Reg. §1.460-6, which require the payment or receipt of interest due to the deferral or acceleration of tax liability from long-term contracts
- Financial Accounting Differences - discusses the typical methods in which construction contracts are handled for financial accounting purposes
- Homebuilders and Developers - covers the definition of a home construction contract (HCC) and the differences between HCCs and residential construction. Proposed regulations affecting developers, homebuilders, and residential contractors are also discussed.
- Problematic Issues - key issues to be targeted by IRS field agents during taxpayer examinations
- Joint Ventures and Sole Proprietors of Residential Construction
Although the Construction ATG is considered neither law nor the official position of the IRS, it is still an excellent source of information for those not well versed in the rules of construction taxation or CFMs who simply need a refresher. Be sure to use the ATG in conjunction with the Internal Revenue Code and Treasury Regulations, however, when working through specific technical matters.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.