Acme Corporation, a calendar year C corporation, is a new client or your CPA firm. Acme has been in business for 15 years and has never been contacted about an audit. When preparing for the first meeting with the Acmes controller, you review the companys financial statements and its most recently filed Form 1120 for the year 2016. You notice that Acme is using the reserve method for bad debts for both book and tax purposes. This is an improper tax accounting method. When reviewing Acmes tax returns, you obtain the following information:

Tax year 2014 Reserve for bad debts at 12/31/13 is $800,000. Bad debt expense for 2014 is $350,000. Net bad debt charge offs are $300,000. Reserve for bad debts at 12/31/14 is $850,000.

Tax Year 2015- Bad debt expense for 2015 is $400,000. Net bad debt charge offs are $450,000. Reserve for bad debts at 12/31/15 is $800,000

Tax year 2016 Bad debt expense for 2016 is 600,000. Net bad debt charge offs are $500,000. Reserve for bad debts at 12/31/2016 is $900,000.

Tax year 2017 So far, net bad debt charge offs are $550,000.

At the meeting you plan to suggest to the Controller, that Acme change its accounting for tax purposes to a proper direct charge off method. Prepare a brief memo describing the process for making this change and the impact on Acmes taxable income.

After the meeting, the controller tells you that Acme recently received a letter from the Internal Revenue Service stating that its tax returns (Form 1120) for the years 2014 and 2015 have been selected for audit. How does this change your advice? If the IRS auditor discovers this improper method, what is the likely impact on taxable income for 2014, 2015, 2016, and 2017? What advice do you have for Acmes controller?