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IRS releases new guidance on accounting method changes

On January 16, the Internal Revenue Service (IRS) released revenue procedures which provide updated guidance for filing for tax accounting method changes.

Revenue Procedure 2015-13 combines the procedural guidance for automatic and advance consent method change requests into one document. Revenue Procedure 2015-14 contains a comprehensive list of method changes for which the IRS will grant consent automatically.

The new guidance generally is effective for Forms 3115, “Application for Change in Accounting Method,” filed on or after January 16 2015, for tax years ending on or after May 31 2014. Form 3115 submissions that follow the advance consent procedures in effect before the release of Revenue Procedure 2015-14 are not required to be updated if they are submitted by March 2 2015.

These are highlights of the most significant changes in the new guidance:

Recognition period for taxable income adjustment 

Taxpayers are required to adjust taxable income to account for the cumulative impact of an accounting method change. If the change in accounting method decreases taxable income, the decrease is taken into account in the year of change. If the change in accounting method increases taxable income, it is taken into account over a four-year period beginning with the year of change. Taxpayers also can elect to recognise the entire amount of the accounting method change in the current year if the amount is less than $50,000.

The new guidance also allows taxpayers to elect to include an increase in income during the year of change if an eligible acquisition occurs. For a controlled foreign corporation or a corporation other than an S corporation, an eligible acquisition generally requires a change in control or the acquisition of the taxpayer’s assets in a tax-free transaction. For partnerships and S corporations, an eligible acquisition occurs when another party acquires an ownership interest that does not cause the taxpayer to cease to exist.  

Eligibility requirements

Under prior guidance, certain taxpayers were not permitted to file an accounting method change. This was a particular concern for taxpayers under IRS examination, who often were required to obtain IRS consent before filing an accounting method change. The new guidance significantly relaxes the eligibility requirements as follows:Taxpayers under IRS examination no longer are required to obtain IRS consent to file Form 3115. Taxpayers under examination must take increases to taxable income over two years instead of the general four-year period. Changes decreasing taxable income are treated identically regardless of whether the taxpayer is under examination. The new guidance significantly relaxes the eligibility requirements as follows:

  • Taxpayers filing an accounting method change while under examination generally will not receive audit protection.
  • Taxpayers under IRS examination for at least 12 months will receive audit protection if they file Form 3115 during the three-month window beginning on the 15th day of the seventh month of their tax year through the 15th day of the 10th month of their tax year. Taxpayers also are granted audit protection for accounting method changes filed within the 120-day window after the end of an IRS examination, regardless of whether a new IRS examination has begun
  • Taxpayers are not permitted to request an accounting method change for any item currently under consideration by the IRS. 

Other changes

The new guidance makes several other clarifications and changes, including changes to guidance related to foreign taxpayers, controlled foreign corporations and foreign partnerships. The revenue procedure also clarifies that a technical termination of a partnership constitutes a cessation of its trade or business. As a result, the partnership will be required to include any unrecognised income from an accounting method change in the year of the technical termination. The new guidance also requires taxpayers to send a copy of all Forms 3115 to the IRS in Ogden, Utah.

The list of changes for which the IRS grants consent automatically was also updated to include all method changes authorised since the issuance of Revenue Procedure 2011-14. Some previously permitted changes were removed, but they were changed to generally conform to guidance issued after Revenue Procedure 2011-14.

Taxpayers who are in the process of filing method changes, including those filing Form 3115 for the adoption of the tangible property regulations, should review the new revenue procedures to determine the impact, if any, on their filings.

David Strong and AJ Schiavone of Crowe Horwath.

Originally published on January 29 by Crowe Horwath. 

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