Description

IRS Tax Audit Manual for the Construction Industry

Overview of the industry including a glossary. Discusses types of contracts; types of contractors (large, small, home builder); change of accounting method; and joint ventures.

TABLE OF CONTENTS

• Chapter 1
  • Introduction to the Construction
  • Industry Intended Audience 1-1
  • The Construction Industry as a
  • Market Segment 1-1
  • Participants in the Construction Industry 1-1
  • Contractors 1-1
  • General/Prime Contractors 1-2
  • Construction Managers 1-2
  • Commercial Contractors 1-2
  • Commercial Project Owners 1-3
  • Residential Construction Developer 1-3
  • Subcontractors 1-3
  • Highway Contractors 1-4
  • Heavy Construction Contractors 1-4
  • Architect/Engineers 1-4
  • Material Suppliers 1-5
  • Construction Lenders 1-5
  • Surety Companies 1-5
  • Multiple Roles 1-5
  • The Contracting Process 1-6
  • Scheduling Subcontractors 1-7
  • Contract Income 1-7
  • Types of Contracts 1-8
  • Long-Term Contracts 1-8
  • Short-Term Contracts 1-8
  • Fixed Price or Lump Sum Contracts 1-8
  • Cost-Plus Contracts 1-8
  • Time and Material Contracts 1-9
  • Unit Price Contracts 1-9
  • Change Orders 1-9
  • Bonding 1-10
  • Building Permits 1-10
  • Notice of Completion 1-11
• Chapter 2
  • Small Contractors Long-Term Contracts 2-1
  • Cash Method 2-1
  • Accrual Method 2-2
  • Percentage of Completion Method 2-2
  • Cost Comparison Method 2-2
  • Work Comparison Method 2-3
  • Completed Contract Method 2-3
  • Cash Versus Accrual 2-4
  • General Background 2-4
  • General Guidelines For Examiner 2-9
  • Alternative Minimum Tax 2-10
  • Potential Issues and Audit Techniques 2-10
  • Obtaining Audit Information 2-10
  • Income Recognition Issues 2-12
  • Income Omission Issues 2-13
  • Underreported Income 2-13
  • Miscellaneous Construction Issues 2-14
  • Schedule M-1 Adjustments 2-17
• Chapter 3
  • Large Contractors Long-Term Contracts
  • Under IRC Section 460 3-1
  • Definition of Long Term Contracts 3-1
  • Contracts Subject to IRC section 460 3-2
  • Contracts Exempt form IRC section 460 3-2
  • Ten Percent Election 3-2
  • Gross Receipts Test 3-3
  • Simplified Cost-to-Cost Method 3-4
  • Revenue Earned Allocations Rules 3-4
  • Allocation of Costs to Long-Term Contracts 3-5
  • Special Rules for Cost-plus and Federal
  • Long-Term Contracts 3-11
  • Severing of Construction or Manufacturing
  • Contracts 3-14
  • Aggregation of Construction or Manufacturing
  • Contracts 3-18
  • Look-Back 3-20 Form 8697,
  • Interest Computation
  • Under the Look-Back Method for
  • Long-Term Contracts 3-21
  • Computation of the Look-Back Method 3-29
  • Information Generally Needed to Audit a
  • Construction Company 3-34
  • Suggested Audit Techniques 3-34
• Chapter 4
  • Home Builders Home Construction
  • Contract Defined 4-1
  • Classes of Home Construction Contracts 4-2
  • Houses Built of Speculation 4-5
  • Houses Built under Contract on Contract’s Land 4-7
  • Home Builder Building on Buyer’s Land 4-7
  • Contractor Working for a Home Builder 4-7
  • Land Developer Estimated Cost of
  • Common Improvements 4-13
  • Interest Capitalization 4-16
• Chapter 5
  • Change of Accounting Method What Is a
  • Method of Accounting 5-1
  • What Is a Change of Accounting Method 5-1
  • Identifying What Is Not a Change in an
  • Accounting Method 5-2
  • Correction of an Error 5-2
  • Change in Underlying Facts 5-2
  • Permanent Difference Not Involving Timing 5-3
  • Taxpayers Under Examination and Requesting
  • to Use Rev. Proc. 97-27 5-3
  • Example of Change in Accounting Method 5-4
  • IRC Section 481(a) Adjustment Calculation 5-6
  • Computation of the “Current Year Adjustment” 5-7
  • IRC Section 481(b) Tax Limitation 5-8
• Chapter 6
  • Construction Joint Ventures Construction
  • Joint Ventures 6-1
  • Types of Joint Ventures 6-1
  • Joint Venture Examination 6-2
  • Information Document Requests 6-3
  • Potential Joint Venture Issues 6-4
  • Formation Issues 6-4
  • Operation Issues 6-5
  • Liquidation/Distribution Issues 6-5
• Appendix
• Appendix A, Section 460 Flowchart A-1
• Appendix B, Cost Capitalization B-1
• Appendix C, Notice 89-15 C-1
• Glossary G-1