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In February, the IRS released Chief Counsel Advice (CCA) 201805001 (https://www.irs.gov/pub/irs-wd/201805001.pdf). In this CCA, the IRS concluded that a consultant who made “egregious misrepresentations” in a cost segregation study was subject to a section 6701 penalty. This penalty would be assessed at $1,000 for each of the client’s returns affected by this study.

The CCA provides very few details about the specifics of the study. The IRS also does not refer to the study in the CCA as a “cost segregation” study, but simply as a study designed to identify “tangible personal property and other tangible property”. The IRS refers to portions of the study “categorizing certain structural components as 5-year property” to be making “egregious misrepresentations”.

This is not the first time in recent years that the IRS has come down hard on inappropriately prepared cost segregation studies. In 2009, the IRS issued a coordinated issue paper (LMSB4-0709-029) stating the position that open-air parking structures are real property and depreciable as buildings over 39 years. The IRS went on to state that, due to the lack of support, the IRS would go after accuracy-related penalties in this area. This was then backed up a few years later under CCA 20125201F.

Then in 2012, the case Peco Foods, Inc. & Subsidiaries, v. Commissioner (T.C. Memo 2012-18) was released. In this case, the courts ruled against a study completed after an agreed upon purchase price allocation was set in the purchase agreement. The court ruled that once a purchase price was agreed upon allocating between real and personal property, the allocation could not be changed after the fact.

What do these all have in common? All of these situations deal with major issues that came up under audit. The IRS is not questioning the validity of quality cost segregation studies, but is going after studies that are inappropriately completed. While we do not know the details surrounding this most recent CCA, we have been told that the misclassifications were egregious.

This leads us to how to choose a quality cost segregation advisor. While some people might want you to believe that there are certifications or certificates that make a cost segregation study more valid, this is not the case. It is, however, important that a provider understand the law that they are interpreting. While cost is a factor with any decision, price should not be the only determining factor when hiring a cost segregation provider. A provider should be able to discuss complex issues supported by citations showing why they are taking certain positions.

McGuire Sponsel will continue to monitor these and other developments as they relate to cost segregation. For more information, contact Dave McGuire at dmcguire@mcguiresponsel.com.

David McGuire

David McGuire

Dave McGuire, Director, is a leading expert on cost segregation, fixed assets and depreciation law. As the co-founder of McGuire Sponsel, Dave’s knowledge in determining asset costs and classification has held up against IRS scrutiny and has built the firm into a trusted industry resource. He is often called on to consult in other areas including the effects of depreciation on complex transactions. View Dave's bio.

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