Publication 538 (Rev. January 2022)

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Department of the Treasury

Internal Revenue Service

Publication 538

(Rev. January 2022)

Cat. No. 15068G

Accounting

Periods and

Methods

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Contents

Future Developments ....................... 1

Introduction .............................. 1

Photographs of Missing Children .............. 2

Accounting Periods ........................ 2

Calendar Year .......................... 2

Fiscal Year ............................. 3

Short Tax Year .......................... 3

Improper Tax Year ....................... 4

Change in Tax Year ...................... 4

Individuals ............................. 4

Partnerships, S Corporations, and Personal

Service Corporations (PSCs) .............. 4

Corporations (Other Than S Corporations and

PSCs) .............................. 7

Accounting Methods ....................... 7

Cash Method ........................... 8

Accrual Method ........................ 10

Inventories ............................ 13

Change in Accounting Method .............. 18

How To Get Tax Help ...................... 18

Future Developments

For the latest information about developments related to

Pub. 538, such as legislation enacted after it was

published, go to IRS.gov/Pub538.

Introduction

Every taxpayer (individuals, business entities, etc.) must

figure taxable income for an annual accounting period

called a tax year. The calendar year is the most common

tax year. Other tax years include a fiscal year and a short

tax year.

Each taxpayer must use a consistent accounting

method, which is a set of rules for determining when to re-

port income and expenses. The most commonly used ac-

counting methods are the cash method and the accrual

method.

Under the cash method, you generally report income in

the tax year you receive it, and deduct expenses in the tax

year in which you pay the expenses.

Under the accrual method, you generally report income

in the tax year you earn it, regardless of when payment is

received. You deduct expenses in the tax year you incur

them, regardless of when payment is made.

This publication explains some of the rules for ac-

counting periods and accounting methods. In

some cases, you may have to refer to other sour-

ces for a more in-depth explanation of the topic.

TIP

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Comments and suggestions. We welcome your com-

ments about this publication and suggestions for future

editions.

You can send us comments through IRS.gov/

FormComments. Or you can write to the Internal Revenue

Service, Tax Forms and Publications, 1111 Constitution

Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each com-

ment received, we do appreciate your feedback and will

consider your comments and suggestions as we revise

our tax forms, instructions, and publications. Don’t send

tax questions, tax returns, or payments to the above ad-

dress.

Getting answers to your tax questions. If you have

a tax question not answered by this publication or the How

To Get Tax Help section at the end of this publication, go

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search

feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year

forms, instructions, and publications.

Ordering forms and publications. Go to IRS.gov/

OrderForms to order current forms, instructions, and pub-

lications; call 800-829-3676 to order prior-year forms and

instructions. The IRS will process your order for forms and

publications as soon as possible. Don’t resubmit requests

you’ve already sent us. You can get forms and publica-

tions faster online.

Photographs of Missing

Children

The Internal Revenue Service is a proud partner with the

National Center for Missing & Exploited Children®

(NCMEC). Photographs of missing children selected by

the Center may appear in this publication on pages that

would otherwise be blank. You can help bring these

children home by looking at the photographs and calling

1-800-THE-LOST (1-800-843-5678) if you recognize a

child.

Useful Items

You may want to see:

Publication

537 Installment Sales

541 Partnerships

542 Corporations

Form (and Instructions)

1128 Application To Adopt, Change, or Retain a Tax

Year

2553 Election by a Small Business Corporation

3115 Application for Change in Accounting Method

537

541

542

1128

2553

3115

8716 Election To Have a Tax Year Other Than a

Required Tax Year

See Ordering forms and publications, earlier, for informa-

tion about getting these publications and forms.

Accounting Periods

You must use a tax year to figure your taxable income. A

tax year is an annual accounting period for keeping re-

cords and reporting income and expenses. An annual ac-

counting period does not include a short tax year (dis-

cussed later). You can use the following tax years:

•

A calendar year; or

•

A fiscal year (including a 52-53-week tax year).

Unless you have a required tax year, you adopt a tax

year by filing your first income tax return using that tax

year. A required tax year is a tax year required under the

Internal Revenue Code or the Treasury Regulations. You

cannot adopt a tax year by merely:

•

Filing an application for an extension of time to file an

income tax return;

•

Filing an application for an employer identification

number (Form SS-4); or

•

Paying estimated taxes.

This section discusses:

•

A calendar year.

•

A fiscal year (including a period of 52 or 53 weeks).

•

A short tax year.

•

An improper tax year.

•

A change in tax year.

•

Special situations that apply to individuals.

•

Restrictions that apply to the accounting period of a

partnership, S corporation, or personal service corpo-

ration.

•

Special situations that apply to corporations.

Calendar Year

A calendar year is 12 consecutive months beginning on

January 1st and ending on December 31st.

If you adopt the calendar year, you must maintain your

books and records and report your income and expenses

from January 1st through December 31st of each year.

If you file your first tax return using the calendar tax

year and you later begin business as a sole proprietor, be-

come a partner in a partnership, or become a shareholder

in an S corporation, you must continue to use the calendar

year unless you obtain approval from the IRS to change it,

or are otherwise allowed to change it without IRS appro-

val. See Change in Tax Year, later.

8716

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Generally, anyone can adopt the calendar year. How-

ever, you must adopt the calendar year if:

•

You keep no books or records;

•

You have no annual accounting period;

•

Your present tax year does not qualify as a fiscal year;

•

You are required to use a calendar year by a provision

in the Internal Revenue Code or Treasury Regula-

tions.

Fiscal Year

A fiscal year is 12 consecutive months ending on the last

day of any month except December 31st. If you are al-

lowed to adopt a fiscal year, you must consistently main-

tain your books and records and report your income and

expenses using the time period adopted.

52-53-Week Tax Year

You can elect to use a 52-53-week tax year if you keep

your books and records and report your income and ex-

penses on that basis. If you make this election, your

52-53-week tax year must always end on the same day of

the week. Your 52-53-week tax year must always end on:

•

Whatever date this same day of the week last occurs

in a calendar month, or

•

Whatever date this same day of the week falls that is

nearest to the last day of the calendar month.

Election. To make the election for the 52-53-week tax

year, attach a statement with the following information to

your tax return.

1. The month in which the new 52-53-week tax year

ends.

2. The day of the week on which the tax year always

ends.

3. The date the tax year ends. It can be either of the fol-

lowing dates on which the chosen day:

a. Last occurs in the month in (1), above, or

b. Occurs nearest to the last day of the month in (1),

above.

When you figure depreciation or amortization, a

52-53-week tax year is generally considered a year of 12

calendar months.

To determine an effective date (or apply provisions of

any law) expressed in terms of tax years beginning, in-

cluding, or ending on the first or last day of a specified cal-

endar month, a 52-53-week tax year is considered to:

•

Begin on the first day of the calendar month beginning

nearest to the first day of the 52-53-week tax year,

and

•

End on the last day of the calendar month ending

nearest to the last day of the 52-53-week tax year.

Example. Assume a tax provision applies to tax years

beginning on or after July 1, which (for purposes of this

example) happens to be a Sunday. For this purpose, a

52-53-week tax year that begins on the last Tuesday of

June, which (for purposes of this example) falls on June

25, is treated as beginning on July 1.

Short Tax Year

A short tax year is a tax year of less than 12 months. A

short period tax return may be required when you (as a

taxable entity):

•

Are not in existence for an entire tax year, or

•

Change your accounting period.

Tax on a short period tax return is figured differently for

each situation.

Not in Existence Entire Year

Even if a taxable entity was not in existence for the entire

year, a tax return is required for the time it was in exis-

tence. Requirements for filing the return and figuring the

tax are generally the same as the requirements for a re-

turn for a full tax year (12 months) ending on the last day

of the short tax year.

Example 1. XYZ Corporation was organized on July

1. It elected the calendar year as its tax year. The corpora-

tion’s first tax return will cover the short period from July 1

through December 31.

Example 2. A calendar year corporation dissolved on

July 23. The corporation’s final return will cover the short

period from January 1 through July 23.

Death of individual. Although the return of the decedent

is a return for the short period beginning with the first day

of his last taxable year and ending with the date of his

death, the filing of a return and the payment of tax for the

decedent may be made as though the decedent had lived

throughout his last taxable year. The decedent’s tax return

must be filed for the decedent by the 15th day of the 4th

month after the close of the individual's regular tax year. If

the due date falls on a Saturday, Sunday, or legal holiday,

file by the next business day. The decedent's final return

will be a short period tax return that begins on January

1st, and ends on the date of death. In the case of a dece-

dent who dies on December 31st, the last day of the regu-

lar tax year, a full calendar-year tax return is required.

Figuring Tax for Short Year

If the IRS approves a change in your tax year or if you are

required to change your tax year, you must figure the tax

and file your return for the short tax period. The short tax

period begins on the first day after the close of your old

tax year and ends on the day before the first day of your

new tax year.

Figure tax for a short year under the general rule, ex-

plained below. You may then be able to use a relief

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procedure, explained later, and claim a refund of part of

the tax you paid.

General rule. Income tax for a short tax year must be

annualized. However, self-employment tax is figured on

the actual self-employment income for the short period.

Individuals. An individual must figure income tax for

the short tax year as follows.

1. Determine your adjusted gross income (AGI) for the

short tax year and then subtract your actual itemized

deductions for the short tax year. You must itemize

deductions when you file a short period tax return.

2. Multiply the dollar amount of your exemptions by the

number of months in the short tax year and divide the

result by 12. Note. For tax years beginning after 2017

and before 2026, the dollar amount of your exemption

is zero (-0-).

3. Subtract the amount in (2) from the amount in (1). The

result is your modified taxable income.

4. Multiply the modified taxable income in (3) by 12, then

divide the result by the number of months in the short

tax year. The result is your annualized income.

5. Figure the total tax on your annualized income using

the appropriate tax rate schedule.

6. Multiply the total tax by the number of months in the

short tax year and divide the result by 12. The result is

your tax for the short tax year.

Relief procedure. You can use a relief procedure to fig-

ure the tax for the short tax year. It may result in less tax.

Under this procedure, the tax is figured by two separate

methods. If the tax figured under both methods is less

than the tax figured under the general rule, you can file a

claim for a refund of part of the tax you paid. For more in-

formation, see section 443(b)(2) of the Internal Revenue

Code and the related Treasury Regulation.

Alternative minimum tax. Individuals, to figure the al-

ternative minimum tax (AMT) due for a short tax year:

1. Figure the annualized alternative minimum taxable in-

come (AMTI) for the short tax period by completing

the following steps.

a. Multiply the AMTI by 12.

b. Divide the result by the number of months in the

short tax year.

2. Multiply the annualized AMTI by the appropriate rate

of tax under section 55(b)(1) of the Internal Revenue

Code. The result is the annualized AMT.

3. Multiply the annualized AMT by the number of months

in the short tax year and divide the result by 12.

For information on the AMT for individuals, see the In-

structions for Form 6251, Alternative Minimum Tax–Indi-

viduals.

Tax withheld from wages. You can claim a credit

against your income tax liability for federal income tax

withheld from your wages. Federal income tax is withheld

on a calendar year basis. The amount of tax withheld in

any calendar year is allowed as a credit for the tax year

beginning in the calendar year.

Improper Tax Year

Taxpayers that have adopted an improper tax year must

change to a proper tax year. For example, if a taxpayer

began business on March 15 and adopted a tax year end-

ing on March 14 (a period of exactly 12 months), this

would be an improper tax year. See Accounting Periods,

earlier, for a description of permissible tax years.

To change to a proper tax year, you must do one of the

following.

•

If you are requesting a change to a calendar tax year,

file an amended income tax return based on a calen-

dar tax year that corrects the most recently filed tax re-

turn that was filed on the basis of an improper tax

year. Attach a completed Form 1128 to the amended

tax return. Write “FILED UNDER REV. PROC. 85-15”

at the top of Form 1128 and file the forms with the In-

ternal Revenue Service Center where you filed your

original return.

•

If you are requesting a change to a fiscal tax year, file

Form 1128 in accordance with the form instructions to

request IRS approval for the change.

Change in Tax Year

Generally, you must file Form 1128 to request IRS appro-

val to change your tax year. See the Instructions for Form

1128 for exceptions. If you qualify for an automatic appro-

val request, a user fee is not required.

Individuals

Generally, individuals must adopt the calendar year as

their tax year. An individual can adopt a fiscal year if the

individual maintains his or her books and records on the

basis of the adopted fiscal year.

Partnerships,

S Corporations,

and Personal Service Corporations

(PSCs)

Generally, partnerships, S corporations (including electing

S corporations), and PSCs must use a required tax year.

A required tax year is a tax year that is required under the

Internal Revenue Code and Treasury Regulations. The

entity does not have to use the required tax year if it re-

ceives IRS approval to use another permitted tax year or

makes an election under section 444 of the Internal Reve-

nue Code (discussed later).

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Partnership

A partnership must conform its tax year to its partners' tax

years unless any of the following apply.

•

The partnership makes an election under section 444

of the Internal Revenue Code to have a tax year other

than a required tax year by filing Form 8716.

•

The partnership elects to use a 52-53-week tax year

that ends with reference to either its required tax year

or a tax year elected under section 444.

•

The partnership can establish a business purpose for

a different tax year.

The rules for the required tax year for partnerships are as

follows.

•

If one or more partners having the same tax year own

a majority interest (more than 50%) in partnership

profits and capital, the partnership must use the tax

year of those partners.

•

If there is no majority interest tax year, the partnership

must use the tax year of all its principal partners. A

principal partner is one who has a 5% or more interest

in the profits or capital of the partnership.

•

If there is no majority interest tax year and the princi-

pal partners do not have the same tax year, the part-

nership generally must use a tax year that results in

the least aggregate deferral of income to the partners.

If a partnership changes to a required tax year be-

cause of these rules, it can get automatic appro-

val by filing Form 1128.

Least aggregate deferral of income. The tax year that

results in the least aggregate deferral of income is deter-

mined as follows.

1. Figure the number of months of deferral for each part-

ner using one partner's tax year. Find the months of

deferral by counting the months from the end of that

tax year forward to the end of each other partner's tax

year.

2. Multiply each partner's months of deferral figured in

step (1) by that partner's share of interest in the part-

nership profits for the year used in step (1).

3. Add the amounts in step (2) to get the aggregate (to-

tal) deferral for the tax year used in step (1).

4. Repeat steps (1) through (3) for each partner's tax

year that is different from the other partners' years.

The partner's tax year that results in the lowest aggre-

gate (total) number is the tax year that must be used by

the partnership. If the calculation results in more than one

tax year qualifying as the tax year with the least aggregate

deferral, the partnership can choose any one of those tax

years as its tax year. However, if one of the tax years that

qualifies is the partnership's existing tax year, the partner-

ship must retain that tax year.

Example. A and B each have a 50% interest in part-

nership P, which uses a fiscal year ending June 30. A

TIP

uses the calendar year and B uses a fiscal year ending

November 30. P must change its tax year to a fiscal year

ending November 30 because this results in the least ag-

gregate deferral of income to the partners, as shown in the

following table.

Year End

12/31:

Year

End

Profits

Interest

Months

Deferral

Interest

Deferral

A 12/31 0.5 -0- -0-

B 11/30 0.5 11 5.5

Total Deferral .......................... 5.5

Year End

11/30:

Year

End

Profits

Interest

Months

Deferral

Interest

Deferral

A 12/31 0.5 1 0.5

B 11/30 0.5 -0- -0-

Total Deferral .......................... 0.5

When determination is made. The determination of

the tax year under the least aggregate deferral rules must

generally be made at the beginning of the partnership's

current tax year. However, the IRS can require the part-

nership to use another day or period that will more accu-

rately reflect the ownership of the partnership. This could

occur, for example, if a partnership interest was transfer-

red for the purpose of qualifying for a particular tax year.

Short period return. When a partnership changes its

tax year, a short period return must be filed. The short pe-

riod return covers the months between the end of the part-

nership's prior tax year and the beginning of its new tax

year.

If a partnership changes to the tax year resulting in the

least aggregate deferral, it must file a Form 1128 with the

short period return showing the computations used to de-

termine that tax year. The short period return must indi-

cate at the top of page 1, “FILED UNDER SECTION

1.706-1.”

More information. For more information about changing

a partnership's tax year, and information about ruling re-

quests, see the Instructions for Form 1128.

S Corporation

All S corporations, regardless of when they became an S

corporation, must use a permitted tax year. A permitted

tax year is any of the following.

•

The calendar year.

•

A tax year elected under section 444 of the Internal

Revenue Code. See Section 444 Election, below, for

details.

•

A 52-53-week tax year ending with reference to the

calendar year or a tax year elected under section 444.

•

Any other tax year for which the corporation estab-

lishes a business purpose.

If an electing S corporation wishes to adopt a tax year

other than a calendar year, it must request IRS approval

using Form 2553, instead of filing Form 1128. For

information about changing an S corporation's tax year

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and information about ruling requests, see the Instructions

for Form 1128.

Personal Service Corporation (PSC)

A PSC must use a calendar tax year unless any of the fol-

lowing apply.

•

The corporation makes an election under section 444

of the Internal Revenue Code. See Section 444 Elec-

tion, below, for details.

•

The corporation elects to use a 52-53-week tax year

ending with reference to the calendar year or a tax

year elected under section 444.

•

The corporation establishes a business purpose for a

fiscal year.

See the Instructions for Form 1120 and Pub. 542 for gen-

eral information about PSCs. For information on adopting

or changing tax years for PSCs and information about rul-

ing requests, see the Instructions for Form 1128.

Section 444 Election

A partnership, S corporation, electing S corporation, or

PSC can elect under section 444 of the Internal Revenue

Code to use a tax year other than its required tax year.

Certain restrictions apply to the election. A partnership or

an S corporation that makes a section 444 election must

make certain required payments and a PSC must make

certain distributions (discussed later). The section 444

election does not apply to any partnership, S corporation,

or PSC that establishes a business purpose for a different

period, explained later.

A partnership, S corporation, or PSC can make a sec-

tion 444 election if it meets all the following requirements.

•

It is not a member of a tiered structure (defined in

Treasury Regulations section 1.444-2T).

•

It has not previously had a section 444 election in ef-

fect.

•

It elects a year that meets the deferral period require-

ment.

Deferral period. The determination of the deferral pe-

riod depends on whether the partnership, S corporation,

or PSC is retaining its tax year or adopting or changing its

tax year with a section 444 election.

Retaining tax year. Generally, a partnership, S cor-

poration, or PSC can make a section 444 election to retain

its tax year only if the deferral period of the new tax year is

3 months or less. This deferral period is the number of

months between the beginning of the retained year and

the close of the first required tax year.

Adopting or changing tax year. If the partnership, S

corporation, or PSC is adopting or changing to a tax year

other than its required year, the deferral period is the num-

ber of months from the end of the new tax year to the end

of the required tax year. The IRS will allow a section 444

election only if the deferral period of the new tax year is

less than the shorter of:

•

Three months, or

•

The deferral period of the tax year being changed.

This is the tax year immediately preceding the year for

which the partnership, S corporation, or PSC wishes

to make the section 444 election.

If the partnership, S corporation, or PSC's tax year is the

same as its required tax year, the deferral period is zero.

Example 1. BD Partnership uses a calendar year,

which is also its required tax year. BD cannot make a sec-

tion 444 election because the deferral period is zero.

Example 2. E, a newly formed partnership, began op-

erations on December 1. E is owned by calendar year

partners. E wants to make a section 444 election to adopt

a September 30 tax year. E's deferral period for the tax

year beginning December 1 is 3 months, the number of

months between September 30 and December 31.

Making the election. Make a section 444 election by fil-

ing Form 8716 with the Internal Revenue Service Center

where the entity will file its tax return. See the instructions

for Form 8716 for information on when to file.

Attach a copy of Form 8716 to Form 1065, Form

1120S, or Form 1120 for the first tax year for which the

election is made.

Terminating the election. The section 444 election re-

mains in effect until it is terminated. If the election is termi-

nated, another section 444 election cannot be made for

any tax year.

The election ends when any of the following applies to

the partnership, S corporation, or PSC.

•

The entity changes to its required tax year.

•

The entity liquidates.

•

The entity becomes a member of a tiered structure.

•

The IRS determines that the entity willfully failed to

comply with the required payments or distributions.

The election will also end if either of the following

events occur.

•

An S corporation's S election is terminated. However,

if the S corporation immediately becomes a PSC, the

PSC can continue the section 444 election of the S

corporation.

•

A PSC ceases to be a PSC. If the PSC elects to be an

S corporation, the S corporation can continue the

election of the PSC.

Required payment for partnership or S corporation.

A partnership or an S corporation must make a required

payment for any tax year:

•

The section 444 election is in effect.

•

The required payment for that year (or any preceding

tax year) is more than $500.

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This payment represents the value of the tax deferral

the owners receive by using a tax year different from the

required tax year.

Form 8752, Required Payment or Refund Under Sec-

tion 7519, must be filed each year the section 444 election

is in effect, even if no payment is due. If the required pay-

ment is more than $500 (or the required payment for any

prior year was more than $500), the payment must be

made when Form 8752 is filed. If the required payment is

$500 or less and no payment was required in a prior year,

Form 8752 must be filed showing a zero amount. See

Form 8752 and its instructions for more information.

Applicable election year. Any tax year a section 444

election is in effect, including the first year, is called an ap-

plicable election year. Form 8752 must be filed and the re-

quired payment made (or zero amount reported) by May

15th of the calendar year following the calendar year in

which the applicable election year begins.

Required distribution for PSC. A PSC with a section

444 election in effect must distribute certain amounts to

employee-owners by December 31 of each applicable

year. If it fails to make these distributions, it may be re-

quired to defer certain deductions for amounts paid to

owner-employees. The amount deferred is treated as paid

or incurred in the following tax year.

For information on the minimum distribution, see the in-

structions for Part I of Schedule H (Form 1120), Section

280H Limitations for a Personal Service Corporation

(PSC).

Back-up election. A partnership, S corporation, or PSC

can file a back-up section 444 election if it requests (or

plans to request) permission to use a business purpose

tax year, discussed later. If the request is denied, the

back-up section 444 election must be activated (if the

partnership, S corporation, or PSC otherwise qualifies).

Making back-up election. The general rules for mak-

ing a section 444 election, as discussed earlier, apply.

When filing Form 8716, type or print “BACK-UP ELEC-

TION” at the top of the form. However, if Form 8716 is

filed on or after the date Form 1128 (or Form 2553) is

filed, type or print “FORM 1128 (or FORM 2553)

BACK-UP ELECTION” at the top of Form 8716.

Activating election. A partnership or S corporation

activates its back-up election by filing the return required

and making the required payment with Form 8752. The

due date for filing Form 8752 and making the payment is

the later of the following dates.

•

May 15 of the calendar year following the calendar

year in which the applicable election year begins.

•

60 days after the partnership or S corporation has

been notified by the IRS that the business year re-

quest has been denied.

A PSC activates its back-up election by filing Form

8716 with its original or amended income tax return for the

tax year in which the election is first effective and printing

on the top of the income tax return, “ACTIVATING

BACK-UP ELECTION.”

52-53-Week Tax Year

A partnership, S corporation, or PSC can use a tax year

other than its required tax year if it elects a 52-53-week

tax year (discussed earlier) that ends with reference to ei-

ther its required tax year or a tax year elected under sec-

tion 444 (discussed earlier).

A newly formed partnership, S corporation, or PSC can

adopt a 52-53-week tax year ending with reference to ei-

ther its required tax year or a tax year elected under sec-

tion 444 without IRS approval. However, if the entity

wishes to change to a 52-53-week tax year or change

from a 52-53-week tax year that references a particular

month to a non-52-53-week tax year that ends on the last

day of that month, it must request IRS approval by filing

Form 1128.

Business Purpose Tax Year

A partnership, S corporation, or PSC establishes the busi-

ness purpose for a tax year by filing Form 1128. See the

Instructions for Form 1128 for details.

Corporations (Other Than S

Corporations and PSCs)

A new corporation establishes its tax year when it files its

first tax return. A newly reactivated corporation that has

been inactive for a number of years is treated as a new

taxpayer for the purpose of adopting a tax year. An S cor-

poration or a PSC must use the required tax year rules,

discussed earlier, to establish a tax year. Generally, a cor-

poration that wants to change its tax year must obtain ap-

proval from the IRS under either the: (a) automatic appro-

val procedures; or (b) ruling request procedures. See the

Instructions for Form 1128 for details.

Accounting Methods

An accounting method is a set of rules used to determine

when and how income and expenses are reported on your

tax return. Your accounting method includes not only your

overall method of accounting, but also the accounting

treatment you use for any material item.

You choose an accounting method when you file your

first tax return. If you later want to change your accounting

method, you must generally get IRS approval. See

Change in Accounting Method, later.

No single accounting method is required of all taxpay-

ers. You must use a system that clearly reflects your in-

come and expenses and you must maintain records that

will enable you to file a correct return. In addition to your

permanent accounting books, you must keep any other

records necessary to support the entries on your books

and tax returns.

You must use the same accounting method from year

to year. An accounting method clearly reflects income

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only if all items of gross income and expenses are treated

the same from year to year.

If you do not regularly use an accounting method that

clearly reflects your income, your income will be refigured

under the method that, in the opinion of the IRS, does

clearly reflect income.

Methods you can use. Generally, you can figure your

taxable income under any of the following accounting

methods.

•

Cash method.

•

Accrual method.

•

Special methods of accounting for certain items of in-

come and expenses.

•

A hybrid method which combines elements of two or

more of the above accounting methods.

Special methods. This publication does not discuss

special methods of accounting for certain items of income

or expenses. For information on reporting income using

one of the long-term contract methods, see section 460 of

the Internal Revenue Code and the related regulations.

The following publications also discuss special methods

of reporting income or expenses.

•

Publication 225, Farmer's Tax Guide.

•

Publication 535, Business Expenses.

•

Publication 537, Installment Sales.

•

Publication 946, How To Depreciate Property.

Hybrid method. Generally, you can use any combi-

nation of cash, accrual, and special methods of account-

ing if the combination clearly reflects your income and you

use it consistently. However, the following restrictions ap-

ply.

•

If an inventory is necessary to account for your in-

come, you must use an accrual method for purchases

and sales. However, see Exception for Small Busi-

ness Taxpayers, later. Generally, you can use the

cash method for all other items of income and expen-

ses. See Inventories, later.

•

If you use the cash method for reporting your income,

you must use the cash method for reporting your ex-

penses.

•

If you use an accrual method for reporting your expen-

ses, you must use an accrual method for figuring your

income.

•

Any combination that includes the cash method is

treated as the cash method for purposes of section

448 of the Internal Revenue Code.

Business and personal items. You can account for

business and personal items using different accounting

methods. For example, you can determine your business

income and expenses under an accrual method, even if

you use the cash method to figure personal items.

Two or more businesses. If you operate two or more

separate and distinct businesses, you can use a different

accounting method for each business. No business is

separate and distinct, unless a complete and separate set

of books and records is maintained for each business.

Note. If you use different accounting methods to cre-

ate or shift profits or losses between businesses (for ex-

ample, through inventory adjustments, sales, purchases,

or expenses) so that income is not clearly reflected, the

businesses will not be considered separate and distinct.

Cash Method

Most individuals and many small businesses (as ex-

plained under Excluded Entities and Exceptions, later)

use the cash method of accounting. Generally, if you pro-

duce, purchase, or sell merchandise, you must keep an

inventory and use an accrual method for sales and pur-

chases of merchandise. See Inventories, later, for excep-

tions to this rule.

Income

Under the cash method, you include in your gross income

all items of income you actually or constructively received

during the tax year. If you received property and services,

you must include their fair market value (FMV) in income.

Constructive receipt. Income is constructively received

when an amount is credited to your account or made

available to you without restriction. You do not need to

have possession of it. If you authorize someone to be your

agent and receive income for you, you are considered to

have received it when your agent receives it. Income is

not constructively received if your control of its receipt is

subject to substantial restrictions or limitations.

Example. You are a calendar year taxpayer. Your

bank credited, and made available, interest to your bank

account in December 2021. You did not withdraw it or en-

ter it into your books until 2022. You must include the

amount in gross income for 2021, the year you construc-

tively received the interest income.

You cannot hold checks or postpone taking pos-

session of similar property from one tax year to

another to postpone paying tax on the income.

You must report the income in the year the property is re-

ceived or made available to you without restriction.

Expenses

Under the cash method, generally, you deduct expenses

in the tax year in which you actually pay them. This in-

cludes business expenses for which you contest liability.

However, you may not be able to deduct an expense paid

in advance. Instead, you may be required to capitalize

certain costs, as explained later under Uniform Capitaliza-

tion Rules.

Expense paid in advance. An expense you pay in ad-

vance is deductible only in the year to which it applies, un-

less the expense qualifies for the 12-month rule.

TIP

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Under the 12-month rule, a taxpayer is not required to

capitalize amounts paid to create certain rights or benefits

for the taxpayer that do not extend beyond the earlier of

the following.

•

12 months after the right or benefit begins, or

•

The end of the tax year after the tax year in which pay-

ment is made.

If you have not been applying the general rule (an ex-

pense paid in advance is deductible only in the year to

which it applies) and/or the 12-month rule to the expenses

you paid in advance, you must obtain approval from the

IRS before using the general rule and/or the 12-month

rule. See

Change in Accounting Method, later.

Example 1. You are a calendar year taxpayer and

pay $3,000 in 2021 for a business insurance policy that is

effective for 3 years (36 months), beginning on July 1,

2021. The general rule that an expense paid in advance is

deductible only in the year to which it applies is applicable

to this payment because the payment does not qualify for

the 12-month rule. Therefore, only $500 (6/36 x $3,000) is

deductible in 2021, $1,000 (12/36 x $3,000) is deductible

in 2022, $1,000 (12/36 x $3,000) is deductible in 2023,

and the remaining $500 is deductible in 2024.

Example 2. You are a calendar year taxpayer and

pay $10,000 on July 1, 2021, for a business insurance

policy that is effective for only 1 year beginning on July 1,

2021. The 12-month rule applies. Therefore, the full

$10,000 is deductible in 2021.

Excluded Entities

The following entities generally cannot use the cash

method, including any combination of methods that in-

cludes the cash method. (However, see Special rules for

farming businesses, later.)

•

A corporation (other than an S corporation). However,

see Exceptions below.

•

A partnership with a corporation (other than an S cor-

poration) as a partner. However, see Exceptions be-

low.

•

A tax shelter, as defined in section 448(d)(3).

Exceptions

The following entities can use the cash method of ac-

counting.

•

Any corporation or partnership, other than a tax shel-

ter, that meets the gross receipts test explained be-

low.

•

A qualified personal service corporation (PSC).

Gross receipts test. A corporation or partnership, other

than a tax shelter, that meets the gross receipts test can

generally use the cash method. A corporation or a part-

nership meets the test if its average annual gross receipts

for the 3 prior tax years were $26 million or less (indexed

for inflation).

Determine an entity’s average annual gross receipts

by:

1. Adding the gross receipts for the 3 prior tax years;

and

2. Dividing the total by 3.

Generally, a partnership applies the test at the partnership

level. Gross receipts for a short tax year are annualized.

Aggregation rules. Organizations that are members

of an affiliated service group or a controlled group of cor-

porations treated as a single employer for tax purposes

must aggregate their gross receipts to determine whether

the gross receipts test is met.

Change to accrual method. A corporation or part-

nership that fails to meet the gross receipts test for any tax

year cannot use the cash method and must change to an

accrual method of accounting, effective for the tax year in

which the entity fails to meet this test. The entity must file

Form 3115 to request the change. See the Instructions for

Form 3115.

Special rules for farming businesses. Generally, a

taxpayer engaged in the trade or business of farming is al-

lowed to use the cash method for its farming business.

However, certain corporations (other than S corporations)

and partnerships that have a partner that is a corporation

must use an accrual method for their farming business,

unless they meet the gross receipts test discussed above.

See chapter 2 of Pub. 225, Farmer's Tax Guide, for

more information.

Qualified Personal Service Corporation (PSC). A cor-

poration that meets the function and ownership tests be-

low is a qualified PSC and can use the cash method.

Function test. A corporation meets the function test if

at least 95% of its activities are in the performance of

services in the fields of health (including veterinary serv-

ices), law, engineering (including surveying and mapping),

architecture, accounting, actuarial science, performing

arts, or consulting.

Ownership test. A corporation meets the ownership

test if substantially all of its stock is owned, directly or indi-

rectly, at all times during the year by one or more of the

following.

1. Employees performing services for the corporation in

a field qualifying under the function test.

2. Retired employees who had performed services in

those fields.

3. The estate of an employee described in (1) or (2).

4. Any other person who acquired the stock by reason of

the death of an employee referred to in (1) or (2), but

only for the 2-year period beginning on the date of

death.

Indirect ownership is generally taken into account if the

stock is owned indirectly through one or more partner-

ships, S corporations, or qualified PSCs. Stock owned by

one of these entities is considered owned by the entity's

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owners in proportion to their ownership interest in that en-

tity. Other forms of indirect stock ownership, such as stock

owned by family members, are generally not considered

when determining if the ownership test is met.

For purposes of the ownership test, a person is not

considered an employee of a corporation unless that per-

son performs more than minimal services for the corpora-

tion.

Change to accrual method. A corporation that fails

to meet the function test for any tax year; or fails to meet

the ownership test at any time during any tax year must

change to an accrual method of accounting, effective for

the year in which the corporation fails to meet either test.

A corporation that fails to meet the function test or the

ownership test is not treated as a qualified PSC for any

part of that tax year.

Accrual Method

Under an accrual method of accounting, you generally re-

port income in the year it is earned and deduct or capital-

ize expenses in the year incurred. The purpose of an ac-

crual method of accounting is to match income and

expenses in the correct year.

Income

Generally, you include an amount in gross income for the

tax year in which the all events test is met. This test is met

when all events have occurred which fix your right to re-

ceive the income and you can determine the amount with

reasonable accuracy. However, if you have an applicable

financial statement (AFS), you include the amount in in-

come no later than when the item of income is reported in

your applicable financial statement (AFS). This is known

as the AFS income inclusion rule, discussed next.

AFS income inclusion rule. Under this rule, you report

an amount in your gross income on the earliest of the fol-

lowing events.

•

When you receive payment.

•

When the income amount is due to you.

•

When you earn the income.

•

When title passes.

•

When included as revenue in your AFS if you have an

AFS.

See Regulations section 1.451-3(a)(5) for a hierarchical

list of financial statements. See Regulations section

1.451-3(b) for guidance in determining the appropriate

AFS income amount when applying the inclusion rule. If

your financial results are reported on the AFS for a group

of entities, use the group's AFS to apply the AFS income

inclusion rule. Generally, the AFS income inclusion rule is

not applicable to you if you use a special method of ac-

counting to report an item of income. See Regulations

section 1.451-3(a)(13) for examples of special methods of

accounting to which the AFS income inclusion rule gener-

ally does not apply.

AFS cost offset method. If you are required to account

for income from the sale of inventory under the AFS in-

come inclusion rule, you may be eligible to elect the AFS

cost offset method. This method allows you to reduce the

reported amount of income accelerated under this rule.

See Regulations section 1.451-3(c) for more information

on the application of this method. If you receive advance

payments for the sale of inventory, you may elect to use

the advance payment cost offset method. See Advance

Payments below.

Estimated income. If you include a reasonably estima-

ted amount in gross income and later determine the exact

amount is different, take the difference into account in the

tax year you make that determination.

Advance Payments

Generally, you report an advance payment for goods,

services, or other items as income in the year you receive

the payment. However, if you use an accrual method of

accounting, you can elect to postpone including the ad-

vance payment in income until the next year. However,

you cannot postpone including any payment beyond that

tax year.

To be eligible for the deferral method, advance pay-

ments must meet the following requirements:

•

Full inclusion of the payment in gross income in the

year of receipt is a permissible method of accounting;

•

A portion of the advance payment is included in reve-

nue in your applicable financial statement (AFS) for a

subsequent tax year, or if you do not have an AFS,

you earn a portion of the payment in a subsequent tax

year; and

•

You received the advance payment for goods, serv-

ices, or such other items that the Secretary has identi-

fied.

You are considered to receive an item of gross income

if you actually or constructively receive it or it is due and

payable to you.

Certain gift card sales are considered advance pay-

ments and eligible for the deferral method. Certain types

of prepayments are excluded from the definition of ad-

vance payments and are ineligible for this deferral method

such as some types of rent or insurance premiums. See

section 451(c)(B) for exclusions to the term “advance pay-

ment.”

See section 451(c) and Regulations section 1.451-8 for

more information.

How to report payments. Generally, include an ad-

vance payment in income in the year in which you receive

it. However, you may use the deferral method described

above for qualifying advance payments.

Deferral method with AFS. Any advance payment

you include in gross receipts on your tax return must be

included no later than when the income is included on an

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AFS (or other financial statement specified by the IRS in

the year of receipt). The remaining portion of the advance

payment is included as gross income for the subsequent

tax year independent of how it is treated on your AFS.

Non-AFS deferral method. If you do not have an

AFS and elect to use this deferral method, you must in-

clude the advance payment in gross income in the year

received, to the extent you have earned the amount. The

remaining portion of the advance payment is included in

gross income in the subsequent tax year.

IRS approval. The election to defer advance payments

is effective for the tax year that it is first made and for all

subsequent tax years unless you receive consent to re-

voke the election. You must file Form 3115 to obtain IRS

approval to change your method of accounting for ad-

vance payment for services. See Form 3115 and the In-

structions for Form 3115.

Acceleration of advance payments. If you have elec-

ted the deferral method for advance payments, certain

conditions may occur that require you to accelerate inclu-

sion of the advance payments into gross income. Exam-

ples include if you cease to exist, or if your obligation for

the advance payment is satisfied. See Regulations sec-

tions 1.451-8(c)(4) and 1.451-8(d).

Advance Payment Cost Offset Method

If you receive advance payments for the sale of inventory,

you may elect to use the advance payment cost offset

method. If elected, this method of accounting applies to all

advance payments received in your trade or business that

satisfy the criteria. See Regulations section 1.451-8(e) for

the criteria and other information related to this optional

cost offset method.

Specified Goods Exception

The specified goods exception is for a taxpayer that re-

ceives prepayments but does not deliver the good for sev-

eral years in the future. This exclusion applies if you re-

quire a customer to make an upfront payment under a

contract in which all the following apply:

1. The contracted delivery month and year of the good

occurs at least 2 tax years after an upfront payment;

2. You do not have the good or a substantially similar

good on hand at the end of the year the upfront pay-

ment is received; and

3. You recognized all of the revenue from the sale of the

good in your AFS in the year of delivery.

See Regulations section 1.451-8(f).

How to report payments. If you receive a prepayment

that satisfies the specified goods exception, it is excluded

from the treatment afforded to advance payments and in-

stead is analyzed under sections 451(a) and (b), including

the all events test and existing case laws that address the

all events test. Under this analysis, the prepayment could

be includible in the year of receipt.

If you are subject to this exception, you have the option

to treat upfront payments that satisfy the criteria for the

specified good exception as a typical advance payment

under section 451(c). Under section 451(c), the advance

payment is included in gross income under the full inclu-

sion method or the 1-year deferral method.

Expenses

Under an accrual method of accounting, you generally de-

duct or capitalize a business expense when both the fol-

lowing apply.

1. The all-events test has been met. The test is met

when:

a. All events have occurred that fix the fact of liability,

and

b. The liability can be determined with reasonable

accuracy.

2. Economic performance has occurred.

Economic Performance

Generally, you cannot deduct or capitalize a business ex-

pense until economic performance occurs. If your ex-

pense is for property or services provided to you, or for

your use of property, economic performance occurs as

the property or services are provided or the property is

used. If your expense is for property or services you pro-

vide to others, economic performance occurs as you pro-

vide the property or services.

Example. You are a calendar year taxpayer. You buy

office supplies in December 2020. You receive the sup-

plies and the bill in December, but you pay the bill in Janu-

ary 2021. You can deduct the expense in 2020 because

all events have occurred to fix the liability, the amount of

the liability can be determined, and economic perform-

ance occurred in 2020.

Your office supplies may qualify as a recurring item,

discussed later. If so, you can deduct them in 2020, even

if the supplies are not delivered until 2021 (when eco-

nomic performance occurs).

Workers' compensation and tort liability. If you are

required to make payments under workers' compensation

laws or in satisfaction of any tort liability, economic per-

formance occurs as you make the payments. If you are re-

quired to make payments to a special designated settle-

ment fund established by court order for a tort liability,

economic performance occurs as you make the pay-

ments.

Taxes. Economic performance generally occurs as esti-

mated income tax, property taxes, employment taxes, etc.

are paid. However, you can elect to treat taxes as a recur-

ring item, discussed later. You can also elect to ratably ac-

crue real estate taxes. See chapter 5 of Pub. 535 for infor-

mation about real estate taxes.

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Other liabilities. Other liabilities for which economic

performance occurs as you make payments include liabili-

ties for breach of contract (to the extent of incidental, con-

sequential, and liquidated damages), violation of law, re-

bates and refunds, awards, prizes, jackpots, insurance,

and warranty and service contracts.

Interest. Economic performance occurs with the pas-

sage of time (as the borrower uses, and the lender for-

goes use of, the lender's money) rather than as payments

are made.

Compensation for services. Generally, economic per-

formance occurs as an employee renders service to the

employer. However, deductions for compensation or other

benefits paid to an employee in a year subsequent to eco-

nomic performance are subject to the rules governing de-

ferred compensation, deferred benefits, and funded wel-

fare benefit plans. For information on employee benefit

programs, see Pub. 15-B, Employer's Tax Guide to Fringe

Benefits.

Vacation pay. You can take a current deduction for

vacation pay earned by your employees if you pay it dur-

ing the year or, if the amount is vested, within 2

/2 months

after the end of the year. If you pay it later than this, you

must deduct it in the year actually paid. An amount is ves-

ted if your right to it cannot be nullified or cancelled.

Exception for recurring items. An exception to the

economic performance rule allows certain recurring items

to be treated as incurred during the tax year even though

economic performance has not occurred. The exception

applies if all the following requirements are met.

1. The all-events test, discussed earlier, is met.

2. Economic performance occurs by the earlier of the

following dates.

a. 8

/2 months after the close of the year.

b. The date you file a timely return (including exten-

sions) for the year.

3. The item is recurring in nature and you consistently

treat similar items as incurred in the tax year in which

the all-events test is met.

4. Either:

a. The item is not material, or

b. Accruing the item in the year in which the

all-events test is met results in a better match

against income than accruing the item in the year

of economic performance.

This exception does not apply to workers' compensation

or tort liabilities.

Amended return. You may be able to file an amen-

ded return and treat a liability as incurred under the recur-

ring item exception. You can do so if economic perform-

ance for the liability occurs after you file your tax return for

the year, but within 8

/2 months after the close of the tax

year.

Recurrence and consistency. To determine

whether an item is recurring and consistently reported,

consider the frequency with which the item and similar

items are incurred (or expected to be incurred) and how

you report these items for tax purposes. A new expense

or an expense not incurred every year can be treated as

recurring if it is reasonable to expect that it will be incurred

regularly in the future.

Materiality. Factors to consider in determining the

materiality of a recurring item include the size of the item

(both in absolute terms and in relation to your income and

other expenses) and the treatment of the item on your fi-

nancial statements.

An item considered material for financial statement pur-

poses is also considered material for tax purposes. How-

ever, in certain situations an immaterial item for financial

accounting purposes is treated as material for purposes of

economic performance.

Matching expenses with income. Costs directly as-

sociated with the revenue of a period are properly alloca-

ble to that period. To determine whether the accrual of an

expense in a particular year results in a better match with

the income to which it relates, generally accepted ac-

counting principles (GAAP) are an important factor.

For example, if you report sales income in the year of

sale, but you do not ship the goods until the following

year, the shipping costs are more properly matched to in-

come in the year of sale than the year the goods are ship-

ped. Expenses that cannot be practically associated with

income of a particular period, such as advertising costs,

should be assigned to the period the costs are incurred.

However, the matching requirement is considered met for

certain types of expenses. These expenses include taxes,

payments under insurance, warranty, and service con-

tracts, rebates, refunds, awards, prizes, and jackpots.

Expenses Paid in Advance

An expense you pay in advance is deductible only in the

year to which it applies, unless the expense qualifies for

the 12-month rule. Under the 12-month rule, a taxpayer is

not required to capitalize amounts paid to create certain

rights or benefits for the taxpayer that do not extend be-

yond the earlier of the following.

•

12 months after the right or benefit begins, or

•

The end of the tax year after the tax year in which pay-

ment is made.

If you have not been applying the general rule (an ex-

pense paid in advance is deductible only in the year to

which it applies) and/or the 12-month rule to the expenses

you paid in advance, you must get IRS approval before

using the general rule and/or the 12-month rule. See

Change in Accounting Method, later, for information on

how to get IRS approval. See Expense paid in advance

under Cash Method, earlier, for examples illustrating the

application of the general and 12-month rules.

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Related Persons

Business expenses and interest owed to a related person

who uses the cash method of accounting are not deducti-

ble until you make the payment and the corresponding

amount is includible in the related person's gross income.

Determine the relationship for this rule as of the end of the

tax year for which the expense or interest would otherwise

be deductible. See section 267 of the Internal Revenue

Code for the definition of related person.

Inventories

An inventory is necessary to clearly show income when

the production, purchase, or sale of merchandise is an in-

come-producing factor. If you must account for an inven-

tory in your business, you must use an accrual method of

accounting for your purchases and sales. However, see

Exception for Small Business Taxpayers, below. Also, see

Accrual Method, earlier.

To figure taxable income, you must value your inven-

tory at the beginning and end of each tax year. To deter-

mine the value, you need a method for identifying the

items in your inventory and a method for valuing these

items. See Identifying Cost and Valuing Inventory, later.

The rules for valuing inventory are not the same for all

businesses. The method you use must conform to gener-

ally accepted accounting principles for similar businesses

and must clearly reflect income. Your inventory practices

must be consistent from year to year.

The rules discussed here apply only if they do not

conflict with the uniform capitalization rules of

section 263A and the mark-to-market rules of sec-

tion 475.

Exception for Small Business Taxpayers

If you are a small business taxpayer (defined below), you

can choose not to keep an inventory, but you must still

use a method of accounting for inventory that clearly re-

flects income. A small business taxpayer can account for

inventory by (a) treating the inventory as non-incidental

materials and supplies, or (b) conforming to its treatment

of inventory in an applicable financial statement (as de-

fined in section 451(b)(3)). If it does not have an applica-

ble financial statement, it can use the method of account-

ing used in its books and records prepared according to

its accounting procedures. See Regulations section

1.471-1(b). If, however, you choose to keep an inventory,

you generally must use an accrual method of accounting

and value the inventory each year to determine your cost

of goods sold.

Small business taxpayer. You qualify as a small busi-

ness taxpayer if you:

•

Have average annual gross receipts of $26 million or

less (indexed for inflation) for the 3 prior tax years, and

•

Are not a tax shelter (as defined in section 448(d)(3)).

CAUTION

If your business has not been in existence for all of the

3 tax-year period used in figuring average gross receipts,

base your average on the period it has existed. If your

business has a predecessor entity, include the gross re-

ceipts of the predecessor entity from the 3 tax-year period

when figuring average gross receipts. If your business (or

predecessor entity) had short tax years for any of the 3

tax-year period, annualize your business’s gross receipts

for the short tax years that are part of the 3 tax-year pe-

riod.

Changing your method of accounting for inventory.

If you want to change your method of accounting for in-

ventory, you must file Form 3115. See the Instructions for

Form 3115.

Items Included in Inventory

Your inventory should include all of the following.

•

Merchandise or stock in trade.

•

Raw materials.

•

Work in process.

•

Finished products.

•

Supplies that physically become a part of the item in-

tended for sale.

Merchandise. Include the following merchandise in in-

ventory.

•

Purchased merchandise if title has passed to you,

even if the merchandise is in transit or you do not have

physical possession for another reason.

•

Goods under contract for sale that you have not yet

segregated and applied to the contract.

•

Goods out on consignment.

•

Goods held for sale in display rooms, merchandise

mart rooms, or booths located away from your place

of business.

C.O.D. mail sales. If you sell merchandise by mail

and intend payment and delivery to happen at the same

time, title passes when payment is made. Include the mer-

chandise in your closing inventory until the buyer pays for

it.

Containers. Containers such as kegs, bottles, and

cases, regardless of whether they are on hand or returna-

ble, should be included in inventory if title has not passed

to the buyer of the contents. If title has passed to the

buyer, exclude the containers from inventory. Under cer-

tain circumstances, some containers can be depreciated.

See Pub. 946.

Merchandise not included. Do not include the fol-

lowing merchandise in inventory.

•

Goods you have sold, but only if title has passed to

the buyer.

•

Goods consigned to you.

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•

Goods ordered for future delivery if you do not yet

have title.

Assets. Do not include the following in inventory.

•

Land, buildings, and equipment used in your busi-

ness.

•

Notes, accounts receivable, and similar assets.

•

Real estate held for sale by a real estate dealer in the

ordinary course of business.

•

Supplies that do not physically become part of the

item intended for sale.

Special rules apply to the cost of inventory or

property imported from a related person. See the

regulations under section 1059A of the Internal

Revenue Code.

Identifying Cost

You can use any of the following methods to identify the

cost of items in inventory.

Specific Identification Method

Use the specific identification method when you can iden-

tify and match the actual cost to the items in inventory.

Use the FIFO or LIFO method, explained next, if:

•

You cannot specifically identify items with their costs,

•

The same type of goods are intermingled in your in-

ventory and they cannot be identified with specific in-

voices.

FIFO Method

The FIFO (first-in first-out) method assumes the items you

purchased or produced first are the first items you sold,

consumed, or otherwise disposed of. The items in inven-

tory at the end of the tax year are matched with the costs

of similar items that you most recently purchased or pro-

duced.

LIFO Method

The LIFO (last-in first-out) method assumes the items of

inventory you purchased or produced last are the first

items you sold, consumed, or otherwise disposed of.

Items included in closing inventory are considered to be

from the opening inventory in the order of acquisition and

from those acquired during the tax year.

LIFO rules. The rules for using the LIFO method are

very complex. Two are discussed briefly here. For more

information on these and other LIFO rules, see sections

472 through 474 of the Internal Revenue Code and the re-

lated income tax regulations.

Dollar-value method. Under the dollar-value method

of pricing LIFO inventories, goods and products must be

CAUTION

grouped into one or more pools (classes of items), de-

pending on the kinds of goods or products in the invento-

ries. See Regulations section 1.472-8.

Simplified dollar-value method. Under this method,

you establish multiple inventory pools in general catego-

ries from appropriate government price indexes. You then

use changes in the price index to estimate the annual

change in price for inventory items in the pools.

An eligible small business (average annual gross re-

ceipts of $5 million or less for the 3 preceding tax years)

can elect the simplified dollar-value LIFO method. See

section 474(c).

Taxpayers who cannot use the method under section

474 should see Regulations section 1.472-8(e)(3) for a

similar simplified dollar-value method.

Adopting LIFO method. File Form 970, Application To

Use LIFO Inventory Method, or a statement with all the in-

formation required on Form 970 to adopt the LIFO

method. You must file the form (or the statement) with

your timely filed tax return for the year in which you first

use LIFO.

Differences Between

FIFO and LIFO

Each method produces different income results, depend-

ing on the trend of price levels at the time. In times of infla-

tion, when prices are rising, LIFO will produce a larger

cost of goods sold and a lower closing inventory. Under

FIFO, the cost of goods sold will be lower and the closing

inventory will be higher. However, in times of falling pri-

ces, the opposite will hold.

Valuing Inventory

The value of your inventory is a major factor in figuring

your taxable income. The method you use to value the in-

ventory is very important.

The following methods, described below, are those

generally available for valuing inventory.

•

Cost.

•

Lower of cost or market.

•

Retail.

Goods that cannot be sold. These are goods you can-

not sell at normal prices or they are unusable in the usual

way because of damage, imperfections, shop wear,

changes of style, odd or broken lots, or other similar cau-

ses. You should value these goods at their bona fide sell-

ing price minus direct cost of disposition, no matter which

method you use to value the rest of your inventory. If

these goods consist of raw materials or partly finished

goods held for use or consumption, you must value them

on a reasonable basis, considering their usability and con-

dition. Do not value them for less than scrap value. For

more information, see Regulations section 1.471-2(c).

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Cost Method

To properly value your inventory at cost, you must include

all direct and indirect costs associated with it. The follow-

ing rules apply.

•

For merchandise on hand at the beginning of the tax

year, cost means the ending inventory price of the

goods.

•

For merchandise purchased during the year, cost

means the invoice price minus appropriate discounts

plus transportation or other charges incurred in acquir-

ing the goods. It can also include other costs that have

to be capitalized under the uniform capitalization rules

of section 263A of the Internal Revenue Code.

•

For merchandise produced during the year, cost

means all direct and indirect costs that have to be

capitalized under the uniform capitalization rules.

Discounts. A trade discount is a discount allowed re-

gardless of when the payment is made. Generally, it is for

volume or quantity purchases. You must reduce the cost

of inventory by a trade (or quantity) discount.

A cash discount is a reduction in the invoice or pur-

chase price for paying within a prescribed time period.

You can choose either to deduct cash discounts or in-

clude them in income, but you must treat them consis-

tently from year to year.

Lower of Cost or Market Method

Under the lower of cost or market method, compare the

market value of each item on hand on the inventory date

with its cost and use the lower of the two as its inventory

value.

This method applies to the following.

•

Goods purchased and on hand.

•

The basic elements of cost (direct materials, direct la-

bor, and certain indirect costs) of goods being manu-

factured and finished goods on hand.

This method does not apply to the following. They must

be inventoried at cost.

•

Goods on hand or being manufactured for delivery at

a fixed price on a firm sales contract (that is, not le-

gally subject to cancellation by either you or the

buyer).

•

Goods accounted for under the LIFO method.

Example. Under the lower of cost or market method,

the following items would be valued at $600 in closing in-

ventory.

Item Cost Market Lower

R .................. $300 $500 $300

S .................. 200 100 100

T .................. 450 200 200

Total ................ $950 $800 $600

You must value each item in the inventory separately.

You cannot value the entire inventory at cost ($950) and

at market ($800) and then use the lower of the two figures.

Market value. Under ordinary circumstances for normal

goods, market value means the usual bid price on the

date of inventory. This price is based on the volume of

merchandise you usually buy. For example, if you buy

items in small lots at $10 an item and a competitor buys

identical items in larger lots at $8.50 an item, your usual

market price will be higher than your competitor's.

Lower than market. When you offer merchandise for

sale at a price lower than market in the normal course of

business, you can value the inventory at the lower price,

minus the direct cost of disposition. Determine these pri-

ces from the actual sales for a reasonable period before

and after the date of your inventory. Prices that vary mate-

rially from the actual prices will not be accepted as reflect-

ing the market.

No market exists. If no market exists, or if quotations

are nominal because of an inactive market, you must use

the best available evidence of fair market price on the

date or dates nearest your inventory date. This evidence

could include the following items.

•

Specific purchases or sales you or others made in

reasonable volume and in good faith.

•

Compensation amounts paid for cancellation of con-

tracts for purchase commitments.

Retail Method

Under the retail method, the total retail selling price of

goods on hand at the end of the tax year in each depart-

ment or of each class of goods is reduced to approximate

cost by using an average markup expressed as a percent-

age of the total retail selling price.

To figure the average markup, apply the following steps

in order.

1. Add the total of the retail selling prices of the goods in

the opening inventory and the retail selling prices of

the goods you bought during the year (adjusted for all

markups and markdowns).

2. Subtract from the total in (1) the cost of goods inclu-

ded in the opening inventory plus the cost of goods

you bought during the year.

3. Divide the balance in (2) by the total selling price in

(1). The result is the average markup percentage.

Then determine the approximate cost in three steps.

1. Subtract the sales at retail from the total retail selling

price. The result is the closing inventory at retail.

2. Multiply the closing inventory at retail by the average

markup percentage. The result is the markup in clos-

ing inventory.

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3. Subtract the markup in (2) from the closing inventory

at retail. The result is the approximate closing

inventory at cost.

Closing inventory. The following example shows how

to figure your closing inventory using the retail method.

Example. Your records show the following information

on the last day of your tax year.

Retail

Item Cost Value

Opening inventory .............. $52,000 $60,000

Purchases ................... 53,000 78,500

Sales ...................... 98,000

Markups .................... 2,000

Markdowns .................. 500

Using the retail method, determine your closing inven-

tory as follows.

Retail

Item Cost Value

Opening inventory .............. $52,000 $60,000

Plus: Purchases ............... 53,000 78,500

Net markups

($2,000 − $500 markdowns) ....... 1,500

Total ...................... $105,000 $140,000

Minus: Sales .......................... 98,000

Closing inventory at retail .................. $42,000

Minus: Markup* (.25 × $42,000) .............. 10,500

Closing inventory at cost .................. $31,500

* See Markup percentage, next, for an explanation of how the markup

percentage (25%) was figured for this example.

Markup percentage. The markup ($35,000) is the

difference between cost ($105,000) and the retail value

($140,000). Divide the markup by the total retail value to

get the markup percentage (25%). You cannot use arbi-

trary standard percentages of purchase markup to deter-

mine markup. You must determine it as accurately as pos-

sible from department records for the period covered by

your tax return.

Markdowns. When determining the retail selling price

of goods on hand at the end of the year, markdowns are

recognized only if the goods were offered to the public at

the reduced price. Markdowns not based on an actual re-

duction of retail sales price, such as those based on de-

preciation and obsolescence, are not allowed.

Retail method with LIFO. If you use LIFO with the retail

method, you must adjust your retail selling prices for

markdowns as well as markups.

Price index. If you are using the retail method and LIFO,

adjust the inventory value, determined using the retail

method, at the end of the year to reflect price changes

since the close of the preceding year. Generally, to make

this adjustment, you must develop your own retail price in-

dex based on an analysis of your own data under a

method acceptable to the IRS. However, a department

store using LIFO that offers a full line of merchandise for

sale can use an inventory price index provided by the Bu-

reau of Labor Statistics. Other sellers can use this index if

they can demonstrate the index is accurate, reliable, and

suitable for their use.

Retail method without LIFO. If you do not use LIFO

and have been determining your inventory under the retail

method except that, to approximate the lower of cost or

market, you have followed the consistent practice of ad-

justing the retail selling prices of goods for markups (but

not markdowns), you can continue that practice. The ad-

justments must be bona fide, consistent, and uniform and

you must also exclude markups made to cancel or correct

markdowns. The markups you include must be reduced

by markdowns made to cancel or correct the markups.

If you do not use LIFO and you previously determined

inventories without eliminating markdowns in making ad-

justments to retail selling prices, you can continue this

practice only if you first get IRS approval. You can adopt

and use this practice on the first tax return you file for the

business, subject to IRS approval on examination of your

tax return.

Figuring income tax. Resellers who use the retail

method of pricing inventories can determine their tax on

that basis.

To use this method, you must do all of the following.

•

State that you are using the retail method on your tax

return.

•

Keep accurate records.

•

Use this method each year unless the IRS allows you

to change to another method.

You must keep records for each separate department

or class of goods carrying different percentages of gross

profit. Purchase records should show the firm name, date

of invoice, invoice cost, and retail selling price. You should

also keep records of the respective departmental or class

accumulation of all purchases, markdowns, sales, stock,

etc.

Perpetual or Book Inventory

You can figure the cost of goods on hand by either a per-

petual or book inventory if inventory is kept by following

sound accounting practices. Inventory accounts must be

charged with the actual cost of goods purchased or pro-

duced and credited with the value of goods used, transfer-

red, or sold. Credits must be determined on the basis of

the actual cost of goods acquired during the year and their

inventory value at the beginning of the tax year.

Physical inventory. You must take a physical inventory

at reasonable intervals and the book amount for inventory

must be adjusted to agree with the actual inventory.

Loss of Inventory

You claim a casualty or theft loss of inventory, including

items you hold for sale to customers, through the increase

in the cost of goods sold by properly reporting your

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opening and closing inventories. You cannot claim the

loss again as a casualty or theft loss. Any insurance or

other reimbursement you receive for the loss is taxable.

You can choose to claim the loss separately as a casu-

alty or theft loss. If you claim the loss separately, adjust

opening inventory or purchases to eliminate the loss items

and avoid counting the loss twice.

If you claim the loss separately, reduce the loss by the

reimbursement you receive or expect to receive. If you do

not receive the reimbursement by the end of the year, you

cannot claim a loss for any amounts you reasonably ex-

pect to recover.

Forgiveness of indebtedness by creditors or suppli-

ers. If your creditors or suppliers forgive part of what you

owe them because of your inventory loss, this amount is

treated as taxable income.

Disaster loss. If your inventory loss is due to a disaster

in an area determined by the President of the United

States to be eligible for federal assistance, you can

choose to deduct the loss on your return for the immedi-

ately preceding year. However, you must also decrease

your opening inventory for the year of the loss so the loss

will not show up again in inventory.

Uniform Capitalization Rules

Under the uniform capitalization rules, you must capitalize

the direct costs and part of the indirect costs for produc-

tion or resale activities. Include these costs in the basis of

property you produce or acquire for resale, rather than

claiming them as a current deduction. You recover the

costs through depreciation, amortization, or cost of goods

sold when you use, sell, or otherwise dispose of the prop-

erty.

Special uniform capitalization rules apply to a

farming business. See chapter 6 in Pub. 225.

Activities subject to the rules. You are subject to the

uniform capitalization rules if you do any of the following,

unless the property is produced for your use other than in

a trade or business or an activity carried on for profit.

•

Produce real or tangible personal property.

•

Acquire property for resale. However, see the excep-

tion for certain small taxpayers, discussed later.

Producing property. You produce property if you

construct, build, install, manufacture, develop, improve,

create, raise, or grow the property. Property produced for

you under a contract is treated as produced by you to the

extent you make payments or otherwise incur costs in

connection with the property.

Tangible personal property. Tangible personal

property includes films, sound recordings, video tapes,

books, artwork, photographs, or similar property contain-

ing words, ideas, concepts, images, or sounds. However,

CAUTION

freelance authors, photographers, and artists are exempt

from the uniform capitalization rules if they qualify.

Exceptions. The uniform capitalization rules do not apply

to the following.

•

A small business taxpayer that meets the gross re-

ceipts test under section 448(c) and that is not a tax

shelter.

•

Property produced to use as personal or nonbusiness

property or for uses not connected with a trade or

business or an activity conducted for profit.

•

Research and experimental expenditures deductible

under section 174.

•

Intangible drilling and development costs of oil and

gas or geothermal wells or any amortization deduction

allowable under section 59(e) for intangible drilling,

development, or mining exploration expenditures.

•

Property produced under a long-term contract, except

for certain home construction contracts. See section

460(e).

•

Timber and certain ornamental trees raised, harves-

ted, or grown, and the underlying land.

•

Qualified creative expenses paid or incurred as a free-

lance (self-employed) writer, photographer, or artist

that are otherwise deductible on your tax return.

•

Costs allocable to natural gas acquired for resale to

the extent these costs would otherwise be allocable to

cushion gas stored underground.

•

Property produced if substantial construction occurred

before March 1, 1986.

•

Property provided to customers in connection with

providing services. It must be de minimus in amount

and not be included in inventory in the hands of the

service provider.

•

Loan origination.

•

The costs of certain producers who use a simplified

production method and whose total indirect costs are

$200,000 or less. See Regulations section

1.263A-2(b)(3)(iv) for more information.

Qualified creative expenses. Qualified creative ex-

penses are expenses paid or incurred by a freelance

(self-employed) writer, photographer, or artist whose per-

sonal efforts create (or can reasonably be expected to

create) certain properties. These expenses do not include

expenses related to printing, photographic plates, motion

picture films, video tapes, or similar items.

These individuals are defined as follows.

•

A writer is an individual who creates a literary manu-

script, a musical composition (including any accompa-

nying words), or a dance score.

•

A photographer is an individual who creates a photo-

graph or photographic negative or transparency.

•

An artist is an individual who creates a picture, paint-

ing, sculpture, statue, etching, drawing, cartoon,

graphic design, or original print item. The originality

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and uniqueness of the item created and the predomi-

nance of aesthetic value over utilitarian value of the

item created are taken into account.

Personal service corporation. The exemption for

writers, photographers, and artists also applies to an ex-

pense of a personal service corporation that directly re-

lates to the activities of the qualified employee-owner. A

qualified employee-owner is a writer, photographer, or ar-

tist who owns, with certain members of his or her family,

substantially all the stock of the corporation.

Inventories. If you must adopt the uniform capitalization

rules, revalue the items or costs included in beginning in-

ventory for the year of change as if the capitalization rules

had been in effect for all prior periods. When revaluing in-

ventory costs, the capitalization rules apply to all inventory

costs accumulated in prior periods. An adjustment is re-

quired under section 481(a). It is the difference between

the original value of the inventory and the revalued inven-

tory.

If you must capitalize costs for production and resale

activities, you are required to make this change. If you

make the change for the first tax year you are subject to

the uniform capitalization rules, it is an automatic change

of accounting method that does not need IRS approval.

Otherwise, IRS approval is required to make the change.

Change in

Accounting Method

Generally, you can choose any permitted accounting

method when you file your first tax return. You do not need

to obtain IRS approval to choose the initial accounting

method. You must, however, use the method consistently

from year to year and it must clearly reflect your income.

See Accounting Methods, earlier.

Once you have set up your accounting method and

filed your first return, generally, you must receive approval

from the IRS before you change the method. A change in

your accounting method includes a change not only in

your overall system of accounting but also in the treatment

of any material item. A material item is one that affects the

proper time for inclusion of income or allowance of a de-

duction. Although an accounting method can exist without

treating an item consistently, an accounting method is not

established for that item, in most cases, unless the item is

treated consistently.

Approval required. The following are examples of

changes in accounting method that require IRS approval.

•

A change from the cash method to an accrual method

or vice versa.

•

A change in the method or basis used to value inven-

tory.

•

A change in the depreciation or amortization method

(except for certain permitted changes to the

straight-line method).

•

A change involving the adoption, use, or discontinu-

ance of any other specialized method of computing

taxable income.

•

A change where the Internal Revenue Code and

Treasury Regulations specifically require that the con-

sent of the IRS must be obtained before adopting

such a change.

Approval not required. The following are examples of

types of changes that are not changes in accounting

methods and do not require IRS approval.

•

Correction of a math or posting error.

•

Correction of an error in figuring tax liability (such as

an error in figuring a credit).

•

An adjustment of any item of income or deduction that

does not involve the proper time for including it in in-

come or deducting it.

•

Certain adjustments in the useful life of a depreciable

or amortizable asset.

Form 3115. In general, you must file a current Form 3115

to request a change in either an overall accounting

method or the accounting treatment of any item. There are

some instances when you can obtain automatic consent

from the IRS to change to certain accounting methods. In

other instances, you can file Form 3115 using the non-au-

tomatic change request procedures to request an ac-

counting method change.

More information. For more information on making

changes in accounting methods, see Form 3115 and the

Instructions for Form 3115. See Revenue Procedure

2021-34, 2021-35 I.R.B. 337 (or any successor), available

at IRS.gov/irb/2021-35_IRB#REV-PROC-2021-34, for ad-

ditional procedures that may apply for obtaining automatic

consent to change methods of accounting for revenue

recognition and certain other methods of accounting that

may affect the accounting for revenue recognition. Also

see Revenue Procedure 2022-09, 2022-02 I.R.B. 310 (or

any successor) available at IRS.gov/irb/

2022-02_IRB#REV-PROC-2022-9, for additional proce-

dures that may apply for obtaining automatic consent to

change certain methods of accounting related to small

businesses.

When making changes in accounting methods or

when filing Form 3115, you must determine if the

IRS has issued any new published guidance

which includes revenue procedures, revenue rulings, noti-

ces, regulations, or other relevant guidance in the Internal

Revenue Bulletin. For the latest information, visit IRS.gov.

How To Get Tax Help

If you have questions about a tax issue; need help prepar-

ing your tax return; or want to download free publications,

forms, or instructions, go to IRS.gov and find resources

that can help you right away.

CAUTION

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Preparing and filing your tax return. After receiving all

your wage and earnings statements (Forms W-2, W-2G,

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment

compensation statements (by mail or in a digital format) or

other government payment statements (Form 1099-G);

and interest, dividend, and retirement statements from

banks and investment firms (Forms 1099), you have sev-

eral options to choose from to prepare and file your tax re-

turn. You can prepare the tax return yourself, see if you

qualify for free tax preparation, or hire a tax professional to

prepare your return.

For 2021, if you received an Economic Impact

Payment (EIP), refer to your Notice 1444-C, Your

2021 Economic Impact Payment. If you received

Advance Child Tax Credit payments, refer to your Letter

6419.

Free options for tax preparation. Go to IRS.gov to see

your options for preparing and filing your return online or

in your local community, if you qualify, which include the

following.

•

Free File. This program lets you prepare and file your

federal individual income tax return for free using

brand-name tax-preparation-and-filing software or

Free File fillable forms. However, state tax preparation

may not be available through Free File. Go to IRS.gov/

FreeFile to see if you qualify for free online federal tax

preparation, e-filing, and direct deposit or payment op-

tions.

•

VITA. The Volunteer Income Tax Assistance (VITA)

program offers free tax help to people with

low-to-moderate incomes, persons with disabilities,

and limited-English-speaking taxpayers who need

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call

800-906-9887 for information on free tax return prepa-

ration.

•

TCE. The Tax Counseling for the Elderly (TCE) pro-

gram offers free tax help for all taxpayers, particularly

those who are 60 years of age and older. TCE volun-

teers specialize in answering questions about pen-

sions and retirement-related issues unique to seniors.

Go to IRS.gov/TCE, download the free IRS2Go app,

or call 888-227-7669 for information on free tax return

preparation.

•

MilTax. Members of the U.S. Armed Forces and

qualified veterans may use MilTax, a free tax service

offered by the Department of Defense through Military

OneSource. For more information, go to

MilitaryOneSource (MilitaryOneSource.mil/Tax).

Also, the IRS offers Free Fillable Forms, which can be

completed online and then filed electronically regardless

of income.

CAUTION

Using online tools to help prepare your return. Go to

IRS.gov/Tools for the following.

•

The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the

earned income credit (EIC).

•

The Online EIN Application (IRS.gov/EIN) helps you

get an employer identification number (EIN) at no

cost.

•

The Tax Withholding Estimator (IRS.gov/W4app)

makes it easier for everyone to pay the correct amount

of tax during the year. The tool is a convenient, online

way to check and tailor your withholding. It’s more

user-friendly for taxpayers, including retirees and

self-employed individuals. The features include the

following.

▶ Easy to understand language.

▶ The ability to switch between screens, correct

previous entries, and skip screens that don’t apply.

▶ Tips and links to help you determine if you qualify

for tax credits and deductions.

▶ A progress tracker.

▶ A self-employment tax feature.

▶ Automatic calculation of taxable social security

benefits.

•

The First-Time Homebuyer Credit Account Look-up

(IRS.gov/HomeBuyer) tool provides information on

your repayments and account balance.

•

The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On

IRS.gov, you can get up-to-date information on

current events and changes in tax law.

•

IRS.gov/Help: A variety of tools to help you get an-

swers to some of the most common tax questions.

•

IRS.gov/ITA: The Interactive Tax Assistant, a tool that

will ask you questions and, based on your input, pro-

vide answers on a number of tax law topics.

•

IRS.gov/Forms: Find forms, instructions, and publica-

tions. You will find details on 2021 tax changes and

hundreds of interactive links to help you find answers

to your questions.

•

You may also be able to access tax law information in

your electronic filing software.

Need someone to prepare your tax return? There are

various types of tax return preparers, including tax prepar-

ers, enrolled agents, certified public accountants (CPAs),

attorneys, and many others who don’t have professional

credentials. If you choose to have someone prepare your

tax return, choose that preparer wisely. A paid tax pre-

parer is:

•

Primarily responsible for the overall substantive accu-

racy of your return,

•

Required to sign the return, and

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•

Required to include their preparer tax identification

number (PTIN).

Although the tax preparer always signs the return,

you're ultimately responsible for providing all the informa-

tion required for the preparer to accurately prepare your

return. Anyone paid to prepare tax returns for others

should have a thorough understanding of tax matters. For

more information on how to choose a tax preparer, go to

Tips for Choosing a Tax Preparer on IRS.gov.

Advance child tax credit payments. From July

through December 2021, advance payments were sent

automatically to taxpayers with qualifying children who

met certain criteria. The advance child tax credit pay-

ments were early payments of up to 50% of the estimated

child tax credit that taxpayers may properly claim on their

2021 returns. Go to IRS.gov/AdvCTC for more information

about these payments and how they can affect your taxes.

Coronavirus. Go to IRS.gov/Coronavirus for links to in-

formation on the impact of the coronavirus, as well as tax

relief available for individuals and families, small and large

businesses, and tax-exempt organizations.

Employers can register to use Business Services On-

line. The Social Security Administration (SSA) offers on-

line service at SSA.gov/employer for fast, free, and secure

online W-2 filing options to CPAs, accountants, enrolled

agents, and individuals who process Form W-2, Wage

and Tax Statement, and Form W-2c, Corrected Wage and

Tax Statement.

IRS social media. Go to IRS.gov/SocialMedia to see

the various social media tools the IRS uses to share the

latest information on tax changes, scam alerts, initiatives,

products, and services. At the IRS, privacy and security

are our highest priority. We use these tools to share public

information with you. Don’t post your social security num-

ber (SSN) or other confidential information on social me-

dia sites. Always protect your identity when using any so-

cial networking site. The following IRS YouTube channels

provide short, informative videos on various tax-related

topics in English, Spanish, and ASL.

•

Youtube.com/irsvideos.

•

Youtube.com/irsvideosmultilingua.

•

Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal

(IRSVideos.gov) contains video and audio presentations

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can

find information on IRS.gov/MyLanguage if English isn’t

your native language.

Free Over-the-Phone Interpreter (OPI) Service. The

IRS is committed to serving our multilingual customers by

offering OPI services. The OPI service is a federally fun-

ded program and is available at Taxpayer Assistance

Centers (TACs), other IRS offices, and every VITA/TCE

return site. OPI service is accessible in more than 350 lan-

guages.

Accessibility Helpline available for taxpayers with

disabilities. Taxpayers who need information about ac-

cessibility services can call 833-690-0598. The Accessi-

bility Helpline can answer questions related to current and

future accessibility products and services available in al-

ternative media formats (for example, braille, large print,

audio, etc.).

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all of the forms and pub-

lications you may need. Or, you can go to IRS.gov/

OrderForms to place an order.

Getting tax publications and instructions in eBook

format. You can also download and view popular tax

publications and instructions (including the Instructions for

Form 1040) on mobile devices as eBooks at IRS.gov/

eBooks.

Note. IRS eBooks have been tested using Apple's

iBooks for iPad. Our eBooks haven’t been tested on other

dedicated eBook readers, and eBook functionality may

not operate as intended.

Access your online account (individual taxpayers

only). Go to IRS.gov/Account to securely access infor-

mation about your federal tax account.

•

View the amount you owe and a breakdown by tax

year.

•

See payment plan details or apply for a new payment

plan.

•

Make a payment or view 5 years of payment history

and any pending or scheduled payments.

•

Access your tax records, including key data from your

most recent tax return, your EIP amounts, and tran-

scripts.

•

View digital copies of select notices from the IRS.

•

Approve or reject authorization requests from tax pro-

fessionals.

•

View your address on file or manage your communi-

cation preferences.

Tax Pro Account. This tool lets your tax professional

submit an authorization request to access your individual

taxpayer IRS online account. For more information, go to

IRS.gov/TaxProAccount.

Using direct deposit. The fastest way to receive a tax

refund is to file electronically and choose direct deposit,

which securely and electronically transfers your refund di-

rectly into your financial account. Direct deposit also

avoids the possibility that your check could be lost, stolen,

or returned undeliverable to the IRS. Eight in 10 taxpayers

use direct deposit to receive their refunds. If you don’t

have a bank account, go to IRS.gov/DirectDeposit for

more information on where to find a bank or credit union

that can open an account online.

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Getting a transcript of a return. The quickest way to

get a copy of your tax transcript is to go to IRS.gov/

Transcripts. Click on either "Get Transcript Online" or "Get

Transcript by Mail" to order a copy of your transcript. If

you prefer, you can order your transcript by calling

800-908-9946.

Reporting and resolving your tax-related identity

theft issues.

•

Tax-related identity theft happens when someone

steals your personal information to commit tax fraud.

Your taxes can be affected if your SSN is used to file a

fraudulent return or to claim a refund or credit.

•

The IRS doesn’t initiate contact with taxpayers by

email, text messages, telephone calls, or social media

channels to request personal or financial information.

This includes requests for personal identification num-

bers (PINs), passwords, or similar information for

credit cards, banks, or other financial accounts.

•

Go to IRS.gov/IdentityTheft, the IRS Identity Theft

Central webpage, for information on identity theft and

data security protection for taxpayers, tax professio-

nals, and businesses. If your SSN has been lost or

stolen or you suspect you’re a victim of tax-related

identity theft, you can learn what steps you should

take.

•

Get an Identity Protection PIN (IP PIN). IP PINs are

six-digit numbers assigned to taxpayers to help pre-

vent the misuse of their SSNs on fraudulent federal in-

come tax returns. When you have an IP PIN, it pre-

vents someone else from filing a tax return with your

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

•

Go to IRS.gov/Refunds.

•

Download the official IRS2Go app to your mobile de-

vice to check your refund status.

•

Call the automated refund hotline at 800-829-1954.

Note. The IRS can’t issue refunds before mid-Febru-

ary 2022 for returns that claimed the EIC or the additional

child tax credit (ACTC). This applies to the entire refund,

not just the portion associated with these credits.

Making a tax payment. Go to IRS.gov/Payments for in-

formation on how to make a payment using any of the fol-

lowing options.

•

IRS Direct Pay: Pay your individual tax bill or estima-

ted tax payment directly from your checking or sav-

ings account at no cost to you.

•

Debit or credit card: Choose an approved payment

processor to pay online or by phone.

•

Electronic Funds Withdrawal: Schedule a payment

when filing your federal taxes using tax return prepara-

tion software or through a tax professional.

•

Electronic Federal Tax Payment System: Best option

for businesses. Enrollment is required.

•

Check or money order: Mail your payment to the ad-

dress listed on the notice or instructions.

•

Cash: You may be able to pay your taxes with cash at

a participating retail store.

•

Same-Day Wire: You may be able to do same-day

wire from your financial institution. Contact your finan-

cial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to

ensure that the electronic payments you make online, by

phone, or from a mobile device using the IRS2Go app are

safe and secure. Paying electronically is quick, easy, and

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for

more information about your options.

•

Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly install-

ments if you can’t pay your taxes in full today. Once

you complete the online process, you will receive im-

mediate notification of whether your agreement has

been approved.

•

Use the Offer in Compromise Pre-Qualifier to see if

you can settle your tax debt for less than the full

amount you owe. For more information on the Offer in

Compromise program, go to IRS.gov/OIC.

Filing an amended return. You can now file Form

1040-X electronically with tax filing software to amend

2019 or 2020 Forms 1040 and 1040-SR. To do so, you

must have e-filed your original 2019 or 2020 return. Amen-

ded returns for all prior years must be mailed. Go to

IRS.gov/Form1040X for information and updates.

Checking the status of an amended return. Go to

IRS.gov/WMAR to track the status of Form 1040X amen-

ded returns.

Note. It can take up to 3 weeks from the date you filed

your amended return for it to show up in our system, and

processing it can take up to 16 weeks.

Understanding an IRS notice or letter. Go to IRS.gov/

Notices to find additional information about responding to

an IRS notice or letter.

You can use Schedule LEP, Request for Change in

Language Preference, to state a preference to receive no-

tices, letters, or other written communications from the

IRS in an alternative language, when these are available.

Once your Schedule LEP is processed, the IRS will deter-

mine your translation needs and provide you translations

when available. If you have a disability requiring notices in

an accessible format, see Form 9000.

Contacting your local IRS office. Keep in mind, many

questions can be answered on IRS.gov without visiting an

IRS Tax Assistance Center (TAC). Go to IRS.gov/

LetUsHelp for the topics people ask about most. If you still

need help, IRS TACs provide tax help when a tax issue

can’t be handled online or by phone. All TACs now pro-

vide service by appointment so you’ll know in advance

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that you can get the service you need without long wait

times. Before you visit, go to IRS.gov/TACLocator to find

the nearest TAC, check hours, available services, and ap-

pointment options. Or, on the IRS2Go app, under the Stay

Connected tab, choose the Contact Us option and click on

“Local Offices.”

The Taxpayer Advocate Service (TAS)

Is Here To Help You

What is TAS?

TAS is an independent organization within the IRS that

helps taxpayers and protects taxpayer rights. Their job is

to ensure that every taxpayer is treated fairly and that you

know and understand your rights under the Taxpayer Bill

of Rights.

How Can You Learn About Your Taxpayer

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that

all taxpayers have when dealing with the IRS. Go to

TaxpayerAdvocate.IRS.gov to help you understand what

these rights mean to you and how they apply. These are

your rights. Know them. Use them.

What Can TAS Do For You?

TAS can help you resolve problems that you can’t resolve

with the IRS. And their service is free. If you qualify for

their assistance, you will be assigned to one advocate

who will work with you throughout the process and will do

everything possible to resolve your issue. TAS can help

you if:

•

Your problem is causing financial difficulty for you,

your family, or your business;

•

You face (or your business is facing) an immediate

threat of adverse action; or

•

You’ve tried repeatedly to contact the IRS but no one

has responded, or the IRS hasn’t responded by the

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia,

and Puerto Rico. Your local advocate’s number is in your

local directory and at TaxpayerAdvocate.IRS.gov/

Contact-Us. You can also call them at 877-777-4778.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect

many taxpayers. If you know of one of these broad issues,

please report it to them at IRS.gov/SAMS.

TAS for Tax Professionals

TAS can provide a variety of information for tax professio-

nals, including tax law updates and guidance, TAS

programs, and ways to let TAS know about systemic

problems you’ve seen in your practice.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS. LITCs represent in-

dividuals whose income is below a certain level and need

to resolve tax problems with the IRS, such as audits, ap-

peals, and tax collection disputes. In addition, clinics can

provide information about taxpayer rights and responsibili-

ties in different languages for individuals who speak Eng-

lish as a second language. Services are offered for free or

a small fee. To find a clinic near you, visit

TaxpayerAdvocate.IRS.gov/about-us/Low-Income-

Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low Income

Taxpayer Clinic List.

Page 22 Publication 538 (January 2022)