The IRS Cost Segregation Audit Techniques Guide (ATG) is the manual IRS examiners use to review cost segregation studies. It does not approve or ban studies. It explains what examiners check and what a quality study contains.

The ATG states that quality cost segregation studies "greatly expedite the Service's review, thereby minimizing the audit burden on all parties." Audit concerns shouldn't stop a well-documented study.

The stakes are real. R.E. Cost Seg's apartment-building benchmark is 26–38% of depreciable basis, from baseline to optimal. On $5 million of depreciable basis after land, that is $1.3 million to $1.9 million of short-life assets. If all of it qualifies for 100% bonus depreciation, the potential federal tax reduction is about $481,000 to $703,000 at 37%, if usable. See our reclassification percentages by property type. Benchmarks are planning estimates, not a substitute for documented asset classifications.

Key takeaways

• The ATG is IRS examiner guidance, published as Publication 5653, most recently revised in February 2025.
• The 2025 Cost Segregation Audit Technique Guide provides 13 specific elements that constitute a quality study.
• The IRS has not established required standards or a mandated report format for cost segregation studies.
• Contingency fees, rule-of-thumb allocations, and unqualified preparers are recurring problems the ATG flags.
• Studies with little tax impact should be closed expeditiously, according to the guide.
• A look-back study may require Form 3115 to report the accounting-method change and §481(a) catch-up adjustment.

What does the IRS say about cost segregation?

The IRS accepts cost segregation when the study accurately separates and documents each asset's classification. For cost segregation, IRS guidance sits mainly in the ATG, supported by the tax code, regulations, and case law.

There is no licensing requirement, no IRS pre-approval, and no mandated report format for cost segregation. The ATG itself says, "The Service has not established any requirements or standards for the preparation of cost segregation studies." What the law requires is that your asset classifications be correct under the tax code and that you can substantiate them. Three things define compliance:

• The IRS Cost Segregation Audit Techniques Guide. The ATG is not a regulation or a binding standard. It is the guidance examiners use. It sets out acceptable methodologies, favors engineering-based approaches supported by documentation, and lists the 13 elements of a quality study. A report built to the ATG is the closest practical benchmark available.
• The Section 1245 and Section 1250 distinction. This is where the actual legal test sits. Section 1245 generally covers tangible personal property, such as equipment and certain fixtures. Section 1250 covers buildings and their structural components. Land improvements are a separate 15-year class and can fall under either section. Every reclassification has to be defensible under that distinction, supported by relevant case law and revenue rulings, not by a percentage applied across the board.
• Form 3115 for look-back studies. Applying cost segregation to a property you've already filed returns on is a change in accounting method rather than a correction. A look-back study may require Form 3115 to report the accounting-method change and §481(a) catch-up adjustment. R.E. Cost Seg offers Form 3115 preparation, with the completed treatment reviewed and filed by the taxpayer's tax professional. The change is generally made under the IRS automatic change procedures, so advance consent is usually not required.

Studies that fail do so on substantiation, not on paperwork technicalities. Rule-of-thumb allocations, contingency fee arrangements, and preparers without engineering backgrounds are the recurring problems the ATG flags.

What is in the IRS Cost Segregation Audit Techniques Guide?

The IRS Cost Segregation Audit Techniques Guide (ATG) is the IRS's examiner roadmap for reviewing cost segregation studies. It explains how agents evaluate asset classifications, study methodology, documentation quality, and whether costs were properly separated between land, buildings, land improvements, and tangible personal property.

The IRS first issued the guide in 2004. It now appears as Publication 5653, most recently revised in February 2025. Its official title is the Cost Segregation Audit Technique Guide, though most investors search for the "audit techniques guide." The guide is written for examiners, but it doubles as a quality checklist for taxpayers.

For investors, the ATG is useful because it makes the IRS's expectations clear. A cost segregation study that follows the ATG's methodology and documentation standards is easier for examiners to review and defend during an audit.

Which cost segregation methods does the ATG accept?

The ATG describes six approaches and treats the detailed engineering approach from actual cost records as the most accurate. The six are:

1. Detailed engineering approach from actual cost records
2. Detailed engineering cost estimate approach
3. Survey or letter approach
4. Residual estimation approach
5. Sampling or modeling approach
6. "Rule of thumb" approach

The guide calls the actual-cost approach "the most methodical and accurate approach." That approach generally applies only to new construction. Acquired buildings usually use the detailed cost estimate approach, which estimates costs from construction-based data.

The ATG does not certify any approach. It does say a pro-rata step-up factor "is not an acceptable method of establishing the depreciable basis." Fixed-percentage allocations without asset-level support are the weakest on review.

Preparer background matters too. The ATG says "a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background." It adds that cost-estimating experience and tax-law knowledge also count. For more, see our engineer's guide to cost segregation.

Hypothetical application: a $5 million apartment building

Consider a $5 million apartment building with little or no exterior amenities, rather than an amenity-heavy apartment complex. Assume $1 million is allocated to land based on supportable valuation, leaving $4 million of depreciable basis. The 20% land share is an illustration, not a prescribed allocation. Applying the apartment-building baseline gives:

Total reclassification is 26%, or $1,040,000, not 26% of the $5 million purchase price. Under the One Big Beautiful Bill Act (OBBBA) and IRS Notice 2026-11, qualified property acquired and placed in service after January 19, 2025, can receive 100% bonus depreciation. That could deduct that $1,040,000 short-life amount in year one. That produces $384,800 of potential federal tax reduction at 37% if the deductions can be used. This excludes regular depreciation on the remaining building. It is an illustrative calculation, not a documented client result. Amenity-heavy apartment complexes use a separate R.E. Cost Seg benchmark of 32–46%, subject to correct class selection.

The ATG stresses documentation. Invoices, blueprints, specifications, and contractor pay applications support asset classifications. Site visits confirm what was actually built.

How often does the IRS actually audit cost segregation studies?

The IRS does not publish an audit rate for cost segregation studies. The ATG tells examiners to set the scope of review through risk analysis, which weighs tax impact and study quality.

The guide says, "Risk analysis is a subjective process based on the experience, knowledge, and judgment of the examiner." It also says, "Studies with little tax impact should be closed expeditiously."

The practical result: larger deductions and weaker documentation draw more attention. Contingency fees, rule-of-thumb allocations, and unqualified preparers are the recurring concerns.

Red flags that increase audit risk

Contingency fee arrangements receive explicit scrutiny. The ATG says they "create the incentive to maximize the amount of costs attributed to § 1245 property," so "examiners should closely scrutinize studies performed on contingency fees." Large short-life allocations without asset-level documentation can also draw review.

Preparer qualifications matter. Missing documentation, failure to reconcile to actual costs, and no property inspection are also warning signs. Examiners ask preparers whether the properties were inspected and photographed.

Green lights that minimize risk

Engineering-based methods with detailed cost allocations align with what the ATG calls a quality study. R.E. Cost Seg studies include physical inspections, photographic documentation, and invoice verification. These elements demonstrate factual support for classifications.

Proper land value allocation, a clear methodology, and a timely Form 3115 when required also help. Studies that reconcile to the purchase price and construction documents are easier to defend. Quality studies speed up reviews. Poor studies invite scrutiny.

What makes a cost segregation study defensible?

A study is defensible when it is accurate, well documented, and built around the ATG's 13 principal elements of a quality study. R.E. Cost Seg builds its studies around these elements.

The 13 principal elements, as named in the ATG:

1. Preparation by an individual with expertise and experience: construction or engineering background, plus cost-estimating and tax-law knowledge.
2. Detailed description of the methodology: how costs were allocated, step by step.
3. Use of appropriate documentation: drawings, specifications, contractor pay applications (AIA G702 and G703), and invoices.
4. Interviews conducted with appropriate parties: people who know how the property was built and is used.
5. Use of a common nomenclature: terms that match the blueprints and project documents.
6. Use of a standard numbering system: such as CSI MasterFormat, tied to bid documents and pay requests.
7. Explanation of the legal analysis: statutes, regulations, and case law applied to the actual facts.
8. Determination of unit costs and engineering "take-off": documented unit costs traced to the drawings.
9. Organization of assets into lists or groups: asset lists that tie to the fixed asset ledger.
10. Reconciliation of total allocated costs to total actual costs: no missing or duplicated dollars.
11. Explanation of the treatment of indirect costs: how fees and other soft costs were allocated.
12. Identification and listing of § 1245 property: including separately acquired property, to prevent duplication.
13. Consideration of related tax issues: related items the study's results may affect.

Practical application: a $10 million industrial facility

Consider a hypothetical industrial facility with $10 million of depreciable basis, after land is excluded. The illustrative 35% total reclassification below falls inside R.E. Cost Seg's industrial benchmark of 25–39%. The allocation must still be supported by the actual assets:

• Study investment: $15,000
• 5-year property identified: $1.9 million (19% of depreciable basis, such as equipment-specific electrical connections)
• 15-year property identified: $1.6 million (16% of depreciable basis, such as parking areas and exterior lighting)
• Documentation package: 200+ pages, including photos, invoices, and engineering drawings
• Form 3115: needed only if this is a look-back study on property already being depreciated
• First-year deduction if all $3.5 million of short-life property qualifies for 100% bonus: $3.5 million
• Potential federal tax reduction at 37%: about $1,295,000, if the deductions can be used

Quality preparation prevents problems. A documentation package built around the 13 elements answers most examiner questions up front.

What happens if the IRS audits my cost segregation study?

The examiner requests your study, the engagement letter and fee arrangement, supporting invoices and construction documents, and evidence of a site visit. An ATG-aligned report supplies all of it in one package, which helps a review move faster. Ask your preparer what audit support is included before you engage.

The ATG's examination chapter lays out the review in steps. Here is a simplified view.

Step 1: Initial risk analysis

The examiner requests your study and performs a preliminary evaluation. They check for obvious deficiencies: missing documentation, aggressive allocations, and unqualified preparers. Quality studies from R.E. Cost Seg are designed to answer these questions up front.

Step 2: Examination (if warranted)

When materiality thresholds justify continued review, examiners request additional documentation:

• The complete cost segregation report
• Letter of engagement showing scope
• Fee arrangement details (examiners closely scrutinize contingency fees)
• Supporting invoices and construction documents
• Evidence of site visits

Examiners may also interview the preparer. They evaluate methodology depth and accuracy, and whether the study reconciles to actual costs.

Step 3: Specialists and property inspection

Complex properties may bring in an IRS engineer. If a study used sampling, the ATG says "it is imperative that a CAS be consulted," meaning a computer audit specialist. Examiners may also inspect the property to confirm how disputed assets are installed and used.

Frequently asked questions

What is the IRS Cost Segregation Audit Techniques Guide?

It is IRS Publication 5653, the guide examiners use to review cost segregation studies. It covers the legal framework, study approaches, quality elements, and examination steps.

Does the IRS require a cost segregation study to follow the ATG?

No. The ATG states that the IRS "has not established any requirements or standards for the preparation of cost segregation studies." Following the ATG makes a study easier to review and defend.

What are the 13 elements of a quality cost segregation study?

The ATG lists 13 principal elements, including qualified preparation, a detailed methodology, appropriate documentation, a legal analysis, cost reconciliation, and a listing of Section 1245 property. The full list appears above.

Do contingency fees increase cost segregation audit risk?

Yes. The ATG tells examiners to closely scrutinize studies performed on contingency fees because they create an incentive to maximize short-life classifications.

Can I still do cost segregation if I'm worried about recapture?

Usually, yes. Recapture applies when you sell or otherwise dispose of the property in a taxable transaction. 1031 exchanges can defer some or all of it, depending on what is exchanged. Suspended passive losses are released on a fully taxable sale.

The bottom line

The ATG tells you what examiners look for. A study built around its 13 elements is easier to review and defend.

With permanent 100% bonus depreciation for qualified property acquired after January 19, 2025, documentation quality matters more. The deductions are larger, so the study behind them gets more attention.

The benefit still depends on your situation. Rental losses are generally passive under IRS Publication 925. If you qualify as a real estate professional and materially participate, the losses may offset nonpassive income. Depreciation recapture applies when you sell.

R.E. Cost Seg prepares engineering-based cost segregation studies built around the ATG's quality elements.

Get your free proposal today to see what a documented study could show for your property.

Confirm your specific facts, elections, and filing treatment with your tax advisor.