On Jan. 16, 2015, the IRS issued two new revenue procedures that update and revise the general procedures for taxpayers to obtain consent to voluntarily change an accounting method for federal income tax purposes. Highlights of some of the more significant modifications are summarized below.
A taxpayer typically must secure IRS consent before changing a method of accounting for federal income tax purposes. In general, IRS consent is procured by filing Form 3115, Application for Change in Accounting Method. Prior to the issuance of the new guidance, the rules governing the accounting method change consent process were found in Rev. Proc. 97-27 (non-automatic method changes) and Rev. Proc. 2011-14 (automatic method changes). These procedures were intended to encourage taxpayers using non-compliant tax accounting method(s) to voluntarily change to permissible method(s) by providing favorable terms and conditions, including a four-year spread for an unfavorable (i.e., positive) section 481(a) adjustment, and audit protection that prevents the IRS from raising the same issue in an earlier year.
Rev. Proc. 2015-13 provides the general procedures to obtain either non-automatic or automatic IRS consent to change an accounting method. This new revenue procedure modifies and consolidates guidance previously contained in the separate automatic and non-automatic procedures referenced above.
Rev. Proc. 2015-14 provides the list of changes eligible for the automatic change procedures. The new list includes the automatic changes formerly in the Appendix of Rev. Proc. 2014-11 and in subsequently issued guidance; it also revises several existing automatic changes and adds new automatic changes. Revisions to existing automatic changes include certain changes for research and experimental expenditures, overall changes from cash to accrual method, advance payments, and long-term contracts. New automatic changes were added for items impacting certain banks, insurance companies, and mark-to-market method taxpayers.
Effective date and transition rules – In general, the new procedures are effective for Forms 3115 filed on or after Jan. 16, 2015 (i.e., immediately). However, temporary transition relief permits automatic accounting method changes to be filed under either the new procedures or the old procedures for a 2014 tax year ended on or after May 31, 2014, and on or before Jan. 31, 2015. Taxpayers under exam that are adversely affected by the new procedures (discussed below) may wish to file their 2014 automatic method change application(s) under the old procedures, assuming they meet the eligibility requirements, in order to obtain audit protection for prior tax years. Non-automatic changes filed after March 2, 2015, must file Form 3115 under the new procedures. Taxpayers with an advance consent Form 3115 pending at the IRS National Office that is now eligible for automatic consent under the new procedures may convert the filing to an automatic change provided they contact the IRS national office prior to the later of March 31, 2015, or the issuance of the ruling letter for the requested change.
Significant changes for taxpayers under exam – Although the method change procedures for taxpayers not under federal exam remain largely unchanged under the new rules, material revisions were made to the terms and conditions governing accounting method changes filed by taxpayers that are under federal exam. Under the old procedures, a taxpayer under exam generally could not file a voluntary Form 3115 unless it was filed: (1) within the 90-day window, (2) within the 120-day window, (3) with the consent of the director, or (4) for an issue pending without audit protection. However, under three of the four exceptions (the two window periods and pursuant to director consent) taxpayers filing Form 3115 while under exam were granted audit protection for the changed item, meaning the IRS could not raise the same issue for a prior tax year under exam. Conversely, under the new procedures, a taxpayer under exam and outside a window period generally may file Form 3115 at any time without having to obtain director consent, provided all the other terms and conditions are met. However, the tradeoff is the change generally must be made without audit protection, unless the taxpayer qualifies for one of the exceptions outlined below. Absent audit protection, the IRS may propose an exam adjustment and/or involuntarily change to a taxpayer’s accounting method for the same item in a prior open tax year, and potentially impose interest and penalties as well. Consequently, many taxpayers filing Form 3115 while they are under exam may find the terms and conditions of the new procedures to be less favorable than those imposed under the old procedures.
The following is a summary of the six exceptions where a taxpayer under exam may file Form 3115 and obtain audit protection under the new accounting method change procedures:
For a taxpayer under exam and outside a window period, the above-described issue pending exception (no audit protection) and the director consent exception (with audit protection) that existed under the old method change procedures were eliminated and replaced with the following exceptions that permit Form 3115 to be filed with audit protection:
§ 481(a) positive adjustment spread period changes – Under the new procedures, the one-year spread period for a negative § 481(a) adjustment remains unchanged. However, the four-year spread period generally applicable to a positive § 481(a) adjustment has been modified in certain circumstances as follows:
Ogden copy for all automatic changes – Taxpayers are now required to file the duplicate copy of Form 3115 with the IRS in Ogden, Utah, for all automatic method changes. Advance consent changes continue to be filed with the IRS National Office in Washington, DC.
In light of the significant revisions made to the procedures governing accounting method changes (particularly for taxpayers under exam) and the fact that the rules are generally effective immediately, taxpayers in the process of filing method changes, including those implementing the recently enacted tangible property regulations, should review the new revenue procedures and assess the implications to their filings. In particular, taxpayers planning on filing an advance consent method change under the previous 90-day window provisions to address an uncertain tax position potentially requiring a reserve should assess the impact of the new procedures on their year-end tax provision reporting requirements. Similarly, eligible small taxpayers evaluating whether to implement the tangible property regulations using the simplified procedures under Rev. Proc. 2015-20 should assess the impact of the new accounting method change procedures, particularly if they are affected by the revisions made to the audit protection and/or the § 481(a) adjustment spread period provisions.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.