How CPAs Review Cost Segregation Reports

CPA review of cost segregation reports is essential because the CPA is ultimately responsible for the positions taken on the tax return. While the engineering firm provides technical analysis, the CPA must confirm that the study is defensible, properly documented, and aligned with IRS guidance.

A thorough review protects the client from low quality work, reduces audit risk, and ensures that the study can withstand IRS scrutiny if questioned. CPAs who skip this step or accept studies without evaluation expose themselves and their clients to unnecessary risk.

The review process also provides an opportunity for the CPA to understand the study results, identify any unusual classifications, and prepare explanations that may be needed during tax return preparation or future audits. This familiarity strengthens the CPA role in broader cost segregation tax planning.

Every cost segregation report should include certain foundational elements. These elements are not optional. They are required for a study to be considered complete and defensible under IRS standards.

Required components

• Site inspection documentation, including photos and notes from the visit.
• Detailed methodology narrative explaining how components were identified and classified.
• Asset by asset listings showing description, cost, recovery period, and depreciation method for each component.
• Cost allocation support explaining how total basis was allocated across components.
• References to applicable IRS guidance, including the Audit Techniques Guide and relevant revenue rulings.

Reports that omit any of these foundational elements should be flagged for follow up. The CPA should request missing information before proceeding with tax return implementation.

The methodology section of a cost segregation study explains how the engineering firm approached the analysis. CPAs should confirm that the methodology is detailed, not generic, and that it references the specific property being studied.

A strong methodology narrative will describe the site inspection process, the sources of cost data, the methods used to allocate costs, and the rationale for component classifications. Generic boilerplate language that could apply to any property is a warning sign.

The methodology should also align with the IRS Audit Techniques Guide, which provides the framework that IRS examiners use to evaluate studies. CPAs can compare the study methodology to the guide to assess compliance and identify potential issues.

Asset classification is the core of the cost segregation study. CPAs should review the asset listings to confirm that classifications are reasonable and supported by the methodology narrative.

CPAs should question classifications that seem overly aggressive or inconsistent with industry norms. For example, classifying significant portions of the building structure as personal property without clear support is a red flag.

When evaluating classifications, CPAs can also consider how the results compare to guidance on appropriate cost segregation recommendations and typical outcomes for similar property types.

Documentation is the foundation of audit defense. CPAs should verify that the study report includes sufficient detail to support the classifications and that all key documents are included.

Key documentation to verify

• Site inspection photos showing building components and property features.
• Floor plans or diagrams that illustrate component locations.
• Cost data sources, such as construction invoices, settlement statements, or appraisals.
• Asset listings with sufficient detail to identify and locate each component.
• Methodology references to IRS guidance and industry standards.

Missing or incomplete documentation should be requested from the study provider before the CPA implements the results. This ensures that the tax return positions are fully supported.

CPAs should be alert to red flags that indicate a low quality or non compliant study. These warning signs can help identify studies that should be rejected or sent back for revisions.

Common red flags

• No site inspection or reliance on desktop analysis only.
• Generic methodology narratives that do not reference the specific property.
• Asset listings that lack detail or provide only summary totals.
• Classifications that seem aggressive or inconsistent with IRS guidance.
• No references to the IRS Audit Techniques Guide or other authoritative sources.
• Study delivered in a format that cannot be integrated with tax software.
• Provider unwilling to answer CPA questions or provide additional support.

If any of these red flags are present, the CPA should discuss concerns with the client and the study provider. In some cases, the study may need to be redone by a different firm.

A standardized CPA cost segregation checklist improves review efficiency and ensures that all key elements are evaluated consistently. The checklist can be tailored to the CPA practice and updated as IRS guidance evolves.

CPAs can adapt this checklist to include firm specific preferences and client expectations. The goal is to create a repeatable process that reduces variability and improves quality control.

Managing the cost seg report review process requires clear communication with both the client and the study provider. CPAs should set expectations at the start of the engagement about review timelines, deliverables, and potential outcomes.

Once the study is received, the CPA should allocate sufficient time for a thorough review. Rushing the process increases the risk of missing issues. Most CPAs find that one to three hours is sufficient for a detailed review, depending on property complexity.

If the review identifies deficiencies, the CPA should document the issues and communicate them to the provider in writing. Clear documentation protects the CPA and provides a record of due diligence. For CPAs building a comprehensive approach, reviewing the complete CPA guide to cost segregation provides context for how study review integrates with client advisory and implementation responsibilities.

CPAs should reject studies that do not meet minimum quality standards. Accepting a substandard study creates risk for the client and the CPA. It is better to delay implementation than to proceed with a study that cannot be defended.

Common reasons to reject a study include lack of site inspection, missing documentation, overly aggressive classifications, and failure to follow IRS guidance. In these cases, the CPA should advise the client to request a refund or engage a different provider.

If the study is generally sound but has minor deficiencies, the CPA can request revisions. Most reputable providers will address reasonable requests promptly. CPAs facing persistent challenges should also understand common concerns that lead CPAs to hesitate and how to manage those concerns proactively.