The IRS often determines upon audit that a business has over a period of years failed to report properly items of income or expense. In that case, the ability of the government to assert additional tax with respect to each year under audit is commonly limited by Internal Revenue Code (Code) section 6501, under which tax must generally be assessed within 3 years after the return for the relevant period is filed.

Code sections 446 and 481(a), however, provide the IRS with an additional, powerful tool relevant to many such situations. If a taxpayer uses a “method of accounting” that “does not clearly reflect income,” the IRS may require that a different accounting method be used that does clearly reflect income, and that such adjustments be made in connection with application of the new method as are necessary to prevent items from being duplicated or omitted.