IRS Releases Guidance on Treatment of Gift Cards Issued for Merchandise

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The Internal Revenue Service releases two revenue procedures addressing the accounting for gift cards issued to customers in exchange for returned merchandise. Revenue Procedure 2011-17 provides a safe harbor method of accounting for the treatment of gift cards issued to customers in exchange for returned merchandise. The procedure also lays out administrative steps taxpayers must take to obtain consent to change to the method of accounting permitted in the revenue procedure. Taxpayers in the retail industry may treat gift cards issued in exchange for returned goods as a cash refund in the amount of the gift card, IRS says. IRS also issues Rev. Proc. 2011-18, which extends the advance payment deferral method of accounting set out in Rev. Proc. 2004-34 to accrual method taxpayers selling gift cards that can be redeemed by another entity under a gift card service agreement.