Tranquility Funeral Home Inc, your client, is an accrual basis taxpayer that sel

Question

Tranquility Funeral Home Inc, your client, is an accrual basis taxpayer that sells preneed funeral contracts. Under these contracts the customer pays in advance for goods and services to be provided at the contract beneficiary’s death. These payments are refundable at the contract purchaser’s request, pursuant to state law, any time until the goods and services are furnished. Tranquility, consistent with its financial accounting reporting, includes the payment in income for the year the funeral service is provided. The IRS agent insists that the payments be prepaid income subject to tax in the year of receipt. Your client believes that the amounts involved are customer deposits. Write a letter to Tranquility that contains your advice about how the issue should be resolved. The address is 400 Rock Street, Memphis TN 38152

Explanation / Answer

Below are the observations which i would like to include in my letter to In my letter to Tranquility Funeral Home Inc,

The demand made by the IRS agent for insists that the payments be prepaid income subject to tax in the year of receipt is incorrect, as per the accrual basis/method of accounting.

Tranquility Funeral Home Inc fallows accrual basis of accounting, What accrual method of accounting means is company need to recognizes its revenues and expenses as and when they are earned on incurred, not as cash received or cash paid respectively. Under this method purchases and sales must be accounted on accrual basis and net income there on for any accounting period does not necessarily reflect cash receipts and cash payments for that respective accounting period. Revenue from sales of goods and services must be accounted for in the year in which goods are sold and services are provided regardless of when cash is received, even cost of goods sold must also be accounted in the year in which liabilities are incurred.

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