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moldmakingtechnology.com 57 cost of goods sold to capitalize its indirect expenditures into its ending inventory. 3. Get examined by the IRS. This is the least attractive means of correcting mistakes. IRS examinations/audits can be costly, both in terms of employee time to comply with information document requests (IDRs) and professional fees for advising mold builders on the examination. Also, the IRS will control the areas of focus. Companies may not file a claim for credit or refund after the statute of limitations has expired, and the IRS may not assess a tax liability after the statute of limitations has expired. This statute of limitations expires three years after the return was filed or two years after the tax was paid, whichever occurred later. When filing an amended return near the expiration of the statute of limitations, use certi- fied mail with a return receipt. Under IRS guidelines, timely mailed means timely filed, so it is critical that the company is able to prove when the return was filed. The IRS regularly publishes a list of acceptable private delivery services if a filer prefers not to send a return via U.S. mail. What if an error exists in a closed tax year (a year for which the statute of limitations has expired) that affects the tax liability of a tax return within the statute of limitations? Our firm has found that many companies are unaware that the company and the IRS may make adjustments to those items that carry over into tax years for which the statute of limita- tions is not closed. For example, unused net operating losses or tax credits may carry forward to subsequent tax years if unused in the year generated. In 1981 and 1982, the IRS issued revenue rulings that showed how Subchapter C Corporations (a business that is taxed as a legal entity separate from the owners) and the IRS may adjust carryforward items, such as net operating losses or credits, in closed tax years that affect the tax liability in open tax years (years for which the statute of limitations has not expired). In a 1981 revenue ruling, the government provided that companies and the IRS may determine the appropriate amount of net operating loss in a closed tax year that is carried forward into an open tax year. This may work toward the benefit or the detriment of the mold builder. The following year, the government provided that companies and the IRS may determine the appropriate amount of invest- ment tax credits (credits that reward various investments in property and equipment) that were unused in closed years that could be carried forward into open tax years. While this ruling dealt with the investment tax credits, it can be applied to a multitude of general business credits, such as the R&D; tax credit. Prior to 2015, there was some ambiguity as to whether flow-through entities, such as Subchapter S Corporations, limited liability companies (LLCs) and partnerships, could apply the same concepts to their tax items. Flow-through entities report the income, deductions and credits to its owners, and the owners pay the income tax attributable to the entity. In November 2015, the IRS issued a private letter ruling (a means for the Treasury to provide an opinion on an issue specific to a company) indicating that the same concept may apply to flow-through entities. The letter ruling dealt with employer's Federal Insurance Contributions Act (FICA) tip credits, which rewards employers for reporting cash tips so that payroll taxes may be assessed on an employee's tip income. While mold builders are not eligible for this credit, the concept may be applied to tax credits and other carry- forwards that are applicable to mold builders. Like the rules related to Subchapter C Corporations, this can be applied to both credits and loss items. For example, a mold builder may identify R&D; credits in tax years outside of the statute of limitations that may be carried forward to tax years for which the statute of limitations has not expired. Whether the tax return error was made by the mold build- er or the CPA completing the return, or because of a lack of understanding the eligibility requirements of credits and incentives, mold builders should look to correct these mis- takes using the appropriate method. CONTRIBUTOR Michael J. Devereux II, CPA, CMP, is a partner and director of manufacturing, distribution and plastics industry services for Mueller Prost. FOR MORE INFORMATION Mueller Prost / 314-862-2070 mdevereux@muellerprost.com / muellerprost.com Error Correction Benefits • Identification of a missed deduction • Erroneously limiting 100-percent deductible meals to a 50-percent limit • Identification of missed R&D; tax credits • Identification of missed domestic production activities deductions • Identification of hiring tax credits • Identification of fuel excise tax credits • Opportunities to change the mold builder's accounting method that will defer revenue or accelerate expenses Error Correction Costs • Claiming larger deductions for which the mold builder was not entitled • Deducting unreasonable compensation • Deducting life insurance premiums • Claiming larger domestic production activities deductions than entitled • Not complying with the uniform capitalization requirements • Requirements to change the mold builder's accounting method that will accelerate revenue or defer expenses