The Tax Court has accepted taxpayer use of inventory shrinkage estimates over IRS objections, in several recent cases. The IRS has argued that shrinkage must be verified by a physical count before it can be treated as a loss and incorporated into the cost of goods sold. Taxpayers have argued that estimates are permissible to cover periods between the last cyclical inventory count of the year and the end of the year. The Court has found that reasonable estimation methods can result in inventory accounting that clearly reflects income.

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