Hand off the accounting method without losing the year-end cutoff

Locate the method actually used

IRS Publication 538 explains that an accounting method is chosen when the first tax return is filed and must generally be used consistently. A later change generally requires IRS approval. The rules include overall methods and treatment of material items; a bookkeeper’s label is not proof that a tax-method change was authorized.

Collect the first relevant filed return, latest return, schedules, preparer workpapers and any Form 3115/change documentation. Record the taxpayer and return involved. For a disregarded LLC, do not assume the LLC has an ordinary separate income tax return merely because it has an EIN.

Build a two-year cutoff bridge

Under the cash method, income generally includes amounts actually or constructively received. Accrual generally reports income when earned, subject to the all-events test and other rules; expense treatment has additional requirements. An invoice date or payment date alone cannot resolve every item.

• List invoices or obligations spanning year-end, with service/performance date, invoice date, due date, date funds became available and payment date.
• Show the amount included in the prior-year books and return, with a source reference. “Unknown” is safer than assuming zero.
• Show the proposed current-year treatment separately. Flag possible double counting or omission for the preparer.
• Keep prepayments, inventory, related-party balances and restricted funds flagged for their specific rules. Do not apply the simple example to every item.

Fictional cutoff: one invoice, several dates

Cedar Example LLC completes a service on December 20, invoices USD 1,200 on December 22, and receives payment on January 12. The facts say the money was not available before January. Under a simple cash illustration the receipt points to January; an accrual review must consider when the right to income was fixed and amount determinable. This example assumes no special rule and does not decide the actual return treatment.

A January bank feed includes the USD 1,200. If a prior accrual return already included that amount, treating the bank feed as new income again can duplicate it. The handoff therefore links the January receipt to the invoice and the prior-year return workpaper, rather than deleting it from the bank record.

Keep classification, method and year separate

Entity classification asks who or what is taxed; accounting method asks when items are recognized; tax year identifies the reporting period. An EIN notice establishes none of those choices by itself. Publication 538 says an EIN application or extension application does not adopt a tax year.

The 5472 instructions expressly require accrued receipts and payments for a reporting corporation using accrual. Preserve that method evidence in the 5472 review packet; a transaction log of bank movements alone may be incomplete.

Your private worksheet

Keep this record with your own source files. There is nothing to enter or upload here. Copy the headings, or open the plain-text sheet to save locally.

Open the text worksheet →

Taxpayer and period

Entity/owner return involved, tax year, classification evidence and preparer contact kept privately.

Method evidence

First/latest filed return, relevant schedules, workpapers, method by material item and any change documentation.

Open item

Invoice ID, amount, performance/invoice/availability/payment dates and supporting files.

Prior/current bridge

Prior-year book amount, prior-year return amount, current proposal and potential duplication/omission.

Reviewer resolution

Question, applicable rule, conclusion and source; preserve unresolved items before changing software settings.

Two fictional files to compare

Invented examples with no real applicant, taxpayer number or live account.

What completes this review?

The handoff is ready when each open cutoff item links to prior-year treatment and a specific unresolved question or supported resolution. It is a continuity record, not a method election or Form 3115 filing.