In this situation, several assumptions are necessary based on the initial interview and follow up questions.

The examiner must determine approximately how long a job will take from start to finish then assume that all parts are purchased at the beginning of the job. As an example, assume that average job will take 3 weeks from start to finish.

The vendor invoices should then be pulled for those parts which were received during the last month of the taxable year. Any invoices which list parts purchases falling within the 2-week period before the end of the taxable year can then be assumed to have been on premises at the end of the taxable year. In some cases, a cash basis taxpayer will have a credit line established with suppliers. If invoices for parts received in one month are not paid until the subsequent months, the subsequent month's invoices should also be inspected.

Inventory Listed on Return

Even if the taxpayer shows inventory amounts on the returns, it should be a assumed that the amounts are correct. In several cases, taxpayers have stated that their inventory amounts are simply estimates based on a quick look at their lot or do not include specific items, particularly work in process.

Paint and Supplies Inventory

The examiner should also consider whether paints and

supplies should be included as an inventory amount since this can result in a significant amount. This is especially true if the taxpayer maintains his or her own paint supplies and utilizes high grade paint. Several thousand dollars may be incurred for paint purchases at any one time. The examiner should balance this consideration with the materiality of the potential adjustment. If the levels of paint and supplies are minimal, then the examiner may consider passing the adjustment.

The procedures used to determine the amount of inventory on hand at the end of the year requires the judgment of the examiner. If paint purchases are made at the end of the month, then the amount of paint on hand at the end of the year will usually be the greatest. On the other hand, if the paint is usually purchased at the beginning of the month, then the amount of paint will usually be at it's lowest level at the end of the month. Once the examiner determines when the paint and supplies are purchased, the

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Glossary