The IRS has recently announced a new compliance campaign that will focus on large businesses suspected of inflating their cost of goods sold (COGS) to reduce their taxable income. This announcement was made on August 8, 2023, by the IRS Large Business & International Division (LB&I).  LB&I Active Campaigns | Internal Revenue Service (irs.gov)

Compliance campaigns are strategic initiatives aimed at identifying potential tax compliance risks. In this case, LB&I has utilized data analysis and suggestions from IRS compliance employees to identify areas of concern. The overarching goal of these campaigns is to enhance the selection of tax returns, pinpoint issues that carry a risk of non-compliance, and optimize the allocation of limited resources for enforcement.

While the exact details of the campaign's focus weren't explicitly provided, the use of the term "inflated" implies that the IRS is particularly concerned about taxpayers who may be overstating their expenses related to the cost of goods sold. This could involve situations where taxpayers are claiming costs that are not eligible to be counted as inventory or are using incorrect methods to determine their year-end inventory balance.

The introduction of this new campaign suggests that the IRS might intensify its scrutiny of companies that report substantial costs of goods sold. Companies selected for examination under this campaign could expect to receive detailed Information Document Request (IDR) notices pertaining to the calculation of inventory costs and the cost of goods sold for federal income tax purposes. These companies should be prepared to address these inquiries.

Taxpayers who fall under the scope of this campaign should review their current practices for determining inventory balances and making tax adjustments, such as those outlined in IRC (Internal Revenue Code) sections 263A and 471. Ensuring that these methods are accurately reflected in their tax returns will be important to avoid potential compliance issues under the new campaign.

It's important for affected taxpayers to work closely with their tax advisors to navigate these requirements and respond appropriately to any requests from the IRS. By doing so, they can minimize the risk of non-compliance and potentially avoid legal consequences.