-4-
contracted rate. The clients usually pay ASAP within 30 days
after they receive the bills. ASAP has no inventory, has never
had gross receipts that exceeded $5 million, and has always used
the cash method of accounting.
Respondent issued petitioners a notice of deficiency on June
3, 1994, reflecting her determination that they were liable for
an $85,835 deficiency in their 1990 Federal income tax and a
$17,167 penalty under section 6662(a). Prior to issuing the
notice of deficiency, respondent's revenue agent, Mr. Willie
Wimbish, conducted an examination of ASAP and had several
interviews with petitioner and her accountant, Mr. Currie. After
the examination, the revenue agent proposed the deficiency in
petitioners' 1990 income tax, and prepared a Form 886-A
(Explanation of Items) to explain the proposed adjustments. The
agent's explanation included the adjustments, along with a
statement of facts, law, and petitioners' position and the
agent's conclusion as to each item of adjustment. The revenue
agent's report provided the legal and factual bases for the
issuance of the notice of deficiency.
The adjustments in the notice of deficiency were primarily
attributable to respondent's determination that ASAP's use of the
cash method of accounting did not produce a clear reflection of
income (the method of accounting issue). Respondent determined
that the proper method of accounting was the accrual method, and
using that method respondent increased ASAP's taxable income for
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