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DEPRECIABLE ASSETS

This group includes tangible properties of relatively long life which are used in the operation of the business. However, natural resources such as oil or mineral lands are not included in this group of asset account. The following verification procedures should be undertaken on these accounts:

  1. Compare the asset and related reserve amounts as they appear on the tax return, balance sheet, depreciation schedule, and taxpayer’s books and schedules. Compare the beginning and ending figures for the taxable year and reconcile differences or ask the taxpayer to make the necessary reconciliation. Verify the correctness of such reconciliation.
  2. Review depreciation schedule of fixed assets and ascertain propriety of depreciation expense claimed.
  3. Review asset additions during the year by reference to invoices, contracts and other documents and determine if the proper cost basis was used.
    1. Note items which appear to have originated from unusual sources such as appraisal increases, transfers and exchanges, and determine propriety thereof.
    2. Determine if acquisition and installation costs of fixed assets and leasehold improvements have been capitalized.
    3. Ascertain if assets include items of a personal nature. If the assets are used by the officers for their personal use, the depreciation should be disallowed.
    4. Where construction or any other work of a capital nature is performed with the taxpayer’s own labor, equipment and other assets for its own use, be certain that the basis of such asset includes materials, labor and overhead including depreciation.
    5. With regard to the basis of recognition of costs of assets, consider such items as trade-ins, acquisitions from related taxpayers, allocation of cost between land and building and other basis.
  1. Decreases in the asset accounts during the year should be noted. The accuracy of the gains or losses resulting therefrom should be verified and ascertain that the appropriate tax on the transaction, such as value- added tax, if applicable, has been paid.
  2. Ascertain if the taxpayer has transferred assets to the owner, officers, stockholders or to a controlled domestic or foreign corporation for less than fair or adequate consideration.

 

Reference: RAMO 1-2000