New Accounting Method Change Procedures Effective Immediately

The IRS issued two new revenue procedures, Rev. Proc. 2015-13 and Rev. Proc. 2015-14 on January 15, 2015, that update the procedural rules to change a method of accounting for federal income tax purposes, effective immediately.

Rev. Proc. 2015-13 significantly modifies the rules for making a method change while under IRS examination and presents new considerations for taxpayers engaging in certain transactions. The guidance also includes various other changes to the rules. Any taxpayer planning to file any change in method of accounting will need to evaluate the effect of the revised procedures. Rev. Proc. 2015-14 provides the list of changes taxpayers can make automatically under the rules described in Rev. Proc. 2015-13. The transition rule allows taxpayers to continue to file automatic method changes under Rev. Proc. 2011-14 for tax years ending before February 1, 2015. 

Background

Methods of accounting determine when a taxpayer takes into account an item of income or deduction. Taxpayers commonly use accounting method planning techniques to defer or accelerate income, depending on the particular tax situation. Under the previous accounting method change procedures, taxpayers were able to manage risk by changing from erroneous to proper methods of accounting by filing Form 3115 and obtaining back-year audit protection with respect to the erroneous method of accounting. Taxpayers who were under IRS examination could file Form 3115 in a 90-day or 120-day window period, or with district director consent (generally consent of the IRS examining agent). Taxpayers were required to spread the Sec. 481(a) cumulative catch-up adjustment over four years if it was an increase to income, or make the adjustment entirely in the year of change if it was a decrease to income. Specified changes listed in the appendix to the previous revenue procedure were filed under the automatic consent procedure, due when the tax return was filed. Other changes were filed under the advance consent procedure, due by the end of the taxable year with a user fee. 

Highlights of the New Procedures

The new procedures address the general procedures to obtain either advance or automatic consent of IRS, superseding the advance consent procedures of Rev. Proc. 97-27 and the automatic procedures of Rev. Proc. 2011-14. The new procedures apply to Forms 3115 filed on or after Jan. 16, 2015, for a year of change ending on or after May 31, 2014.

The new procedures significantly change the approach for taxpayers under IRS examination. Rev. Proc. 2015-13 removes the restriction of requiring consent of the district director for filing Form 3115 outside a window period. A taxpayer under IRS examination can now file Form 3115 at any time. This streamlines the accounting method change process for taxpayers who want to make a favorable change in method of accounting as there is no longer a need to obtain district director consent. While taxpayers were generally able to obtain such consent in the past, it was often a lengthy process because some IRS agents were unfamiliar with the accounting method procedural rules. This new procedure eliminates this additional paperwork. However, the procedure modifies the terms and conditions for taxpayers filing Form 3115 to correct an erroneous method outside of a window period: (1) no back year audit protection is provided for the change, and (2) the spread period for an unfavorable adjustment is shortened to two years (from four years). Under previous guidance, taxpayers with an unfavorable method change generally filed such changes in a window period rather than requesting district director consent to avoid raising an issue in the examination. Under the revised guidance, taxpayers will likely want to continue to file in the window period to obtain back year audit protection and a four-year spread of the adjustment. 

The procedure also replaces the 90-day window period that began on the first day of the taxable year with a 3-month window period that runs from the fifteenth day of the seventh month to the fifteenth day of the tenth month for taxpayers that have been under continuous audit at least 12 months. This new 3-month window coincides with the timing that most taxpayers are preparing their tax returns and will be more convenient for taxpayers who want to file a change for the current year tax return. Taxpayers who were planning to file in the 90-day window of 2015 should carefully evaluate their options and any effect the new guidance has on their year-end tax provisions. 

Taxpayers engaging in transactions where methods of accounting are a factor should also carefully consider the new rules. The new procedure provides the seller with an optional acceleration of an unfavorable adjustment in certain transactions where an acceleration of the adjustment is not mandatory. Such transactions include the acquisition of a partnership interest that does not cause a technical termination of the partnership, an acquisition of a stock ownership interest in a corporation or CFC that results in a change in control or causes the taxpayer’s taxable year to end, or certain asset acquisitions. This will provide an opportunity to simplify the tax treatment of such transactions when the buyer is obligated to pay the tax related to an adjustment that was spread into a taxable year following the transaction. 

The new revenue procedures make significant changes to the procedures for filing for a change in method of accounting, particular with respect to taxpayers under IRS examination. Any taxpayer planning on filing Form 3115 should carefully review the new guidance. Andersen can provide assistance in evaluating the new rules and implementing changes in methods of accounting.