Revenue Procedure 87-56: A Guide for Taxpayers
Hey readers,
Welcome to our comprehensive guide on Revenue Procedure 87-56. This guide aims to provide you with an in-depth understanding of this important tax procedure, its implications, and how it can impact your tax situation. Let’s dive right in!
Section 1: Overview of Revenue Procedure 87-56
Revenue Procedure 87-56 is an Internal Revenue Service (IRS) pronouncement that outlines the rules and procedures for taxpayers to obtain advance approval of certain accounting methods. It was issued by the IRS in 1987 and has been updated over the years to reflect changes in tax laws and regulations.
Section 2: Eligibility for Advance Approval
Not all taxpayers are eligible to request advance approval under Revenue Procedure 87-56. To be eligible, you must meet the following criteria:
- Your proposed accounting method must be a "specified method" as defined by the IRS.
- You must have a "substantial business purpose" for using the proposed accounting method.
- You must not have previously requested approval for the same accounting method within the past five years.
Section 3: Advance Approval Process
If you meet the eligibility criteria, you can file a request for advance approval with the IRS. The request should be filed on Form 5308 and include the following information:
- A detailed description of the proposed accounting method
- The business purpose for using the proposed accounting method
- Any relevant supporting documentation
The IRS will review your request and notify you of their decision within 180 days.
Section 4: Automatic Consent
In certain cases, taxpayers may obtain automatic consent from the IRS to use a specified accounting method without having to file a request for advance approval. This is known as "automatic consent." To qualify for automatic consent, you must meet the following criteria:
- The proposed accounting method must be one of the specified methods listed in Revenue Procedure 87-56.
- You must not have used a different accounting method for the same item or activity within the past three years.
- You must not be under examination by the IRS or have a pending request for advance approval for the same accounting method.
Section 5: Table Breakdown of Specified Accounting Methods
| Specified Accounting Method | Description |
|---|---|
| Accrual Method | Income is recognized when earned, expenses are recognized when incurred |
| Cash Method | Income is recognized when received, expenses are recognized when paid |
| Installment Method | Income from sales of property is recognized over the term of the installment payments |
| Long-Term Contract Method | Income and expenses for long-term construction contracts are recognized based on the percentage of completion |
| Percentage of Completion Method | Income and expenses for construction contracts are recognized based on the percentage of the contract completed |
Section 6: Conclusion
Revenue Procedure 87-56 is a valuable tool for taxpayers who want to obtain advance approval of certain accounting methods. By following the guidance provided in this procedure, you can ensure that your accounting methods are compliant with IRS regulations and minimize the risk of future tax disputes.
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FAQ about Revenue Procedure 87-56
What is Revenue Procedure 87-56?
The IRS Revenue Procedure 87-56 provides guidelines for taxpayers to self-correct certain errors in prior tax returns.
What types of errors can be corrected?
Errors in:
- Income, deductions, or credits
- Filing status
- Tax calculations
- Any other errors that are not fraudulent or a result of a change in accounting method
Who is eligible to use Revenue Procedure 87-56?
Individuals, corporations, and trusts that have made an error on a tax return filed within the past three years.
How do I use Revenue Procedure 87-56?
File Form 1040X, Amended U.S. Individual Income Tax Return, with the IRS to submit the corrected information.
What is the time limit for filing an amended return under Revenue Procedure 87-56?
Within three years of filing the original return or within two years of the tax being paid, whichever is later.
Can I amend a return for a closed tax year under Revenue Procedure 87-56?
Yes, if the tax year is closed but within the three-year time limit.
What happens if I make a fraudulent correction?
The correction will not be honored and could result in penalties or prosecution.
Can I use Revenue Procedure 87-56 to amend multiple years of returns?
Yes, but each year’s correction must be submitted separately on Form 1040X.
What if I need to make a correction for a year that is outside the three-year time limit?
You may need to file a request for a private letter ruling from the IRS.
Can I file an amended return electronically under Revenue Procedure 87-56?
Yes, using the IRS e-file system or through a tax preparation software program that offers e-filing.
