IRS Updates and Clarifies Procedures for Accounting Method Changes.

(Parker Tax Publishing February 7, 2015)

The IRS has released two revenue procedures that update and revise the general procedures to obtain the consent of the IRS to change a method of accounting for federal income tax purposes. Rev. Proc. 2015-13 and Rev. Proc. 2015-14.

Background

Under Code Sec. 446(e), once a taxpayer has used an accounting method and filed a first return, the taxpayer must receive approval from the IRS before making any change to that accounting method. In general, a taxpayer must file a current Form 3115, Application for Change in Accounting Method, to request a change in either an overall accounting method or the accounting treatment of any item. In certain cases, the IRS issues revenue procedures granting a taxpayer automatic consent to change an accounting method as long as the provisions of the revenue procedure are followed.

Rev. Procs. 2015-13 and 2015-14

The newly issued revenue procedures amplify, clarify, modify and partly supersede Rev. Proc. 2011-14. The two new revenue procedures effectively split former Rev. Proc. 2011-14 in two parts; Rev. Proc. 2015-13 contains the general procedures for changing methods of accounting, either with IRS consent or automatically, and Rev. Proc. 2015-14 lists the automatic changes originally contained in the appendix to Rev. Proc. 2011-14.

While the new revenue procedures contain substantially the same methods and procedures as before, a few significant changes, clarifications, and modifications have been made.

Significant Changes in Rev. Proc. 2015-13

The following is a list of some of the more important changes made by Rev. Proc. 2015-13 affecting both Rev. Proc. 2011-14 and Rev. Proc. 97-27:

(1) Section 3.04(2)(f) clarifies that a sale or exchange of 50 percent or more of the total interest in partnership capital and profits under Code Sec. 708(b)(1)(B) is a transaction that constitutes the cessation of a partnership's trade or business.

(2) Section 3.08 clarifies and modifies the rules for when a method of accounting for an item is under consideration. It provides that an issue is under consideration as of the date of the operative written notification to the taxpayer.

(3) Section 3.17(2) provides that, in the case of a consolidated group, "taxpayer" refers to the individual member of the consolidated group for which the change in method of accounting is requested, or to the common parent of the group acting on behalf of that member.

(4) Section 5.01 modifies the rules for when a taxpayer under examination may file a Form 3115 by including broad eligibility rules that allow taxpayers under examination to request changes in method of accounting.

(5) Section 7.06 provides, consistent with existing practice, a term and condition that requires a taxpayer to maintain accounting records for the year of change and subsequent taxable years to support the method of accounting for which consent is granted to the taxpayer.

(6) Section 8.02(1)(a) modifies the rules for when a taxpayer under examination filing a Form 3115 may receive audit protection by replacing the 90-day window that began on the first day of the taxpayer's taxable year in Rev. Proc. 97-27 and Rev. Proc. 2011-14 with a three-month window that applies to taxpayers that have been under examination for at least 12 consecutive months as of the first day of the three-month window. In addition, in certain circumstances a CFC or 10/50 corporation is eligible to change its method of accounting during the three-month window.

(7) Section 8.02(1)(b) makes a CFC or 10/50 corporation ineligible for the 120-day window.

Additional separate changes to Rev. Proc. 2011-14 and Rev. Proc. 97-27 can be found in Sections 18.02 and 18.03, respectively.

Significant Changes in Rev. Proc. 2015-14

The following is a list of some of the more important changes made by Rev. Proc. 2015-14 affecting the List of Automatic Changes (formerly known as the Appendix of Rev. Proc. 2011-14):

(1) Section 3.01, relating to advances made by a lawyer on behalf of clients includes method changes involving cases handled on a non-contingent fee basis.

(2) Section 7.01, relating to changes for research and experimental (R&E) expenditures under Code Sec. 174, applies to a method change from treating R&E expenditures under any section other than Code Sec. 174 (including Code Sec. 263A) to treating R&E expenditures under Code Sec. 174. This also applies where a taxpayer already has a valid Code Sec. 174 election in effect, but fails to treat a portion of its R&E expenditures in accordance with its valid election. Additionally, a taxpayer may change its method regarding that portion of its R&E expenditures to conform to its valid election.

(3) Section 10.11, relating to changes for tangible property, removes the term "transaction" in describing costs in addition to commissions that facilitate the sale of property by a dealer in property. This term is removed to eliminate inconsistencies and to more accurately reflect the costs described under Reg. Sec. 1.263(a)-1(e)(2).

(4) Section 14.01, relating to overall change from the cash method to an accrual method, provides that a concurrent change to a special method is permitted to be made, if such change is also an automatic change, a section of the Code, or regulations, or in other guidance published in the Internal Revenue Bulletin.

(5) Section 18.01, relating to changes for long-term contracts, includes a change made by a taxpayer that is required to change its method of accounting for its long-term contracts as defined in Code Sec. 460(f) to the percentage of completion method (PCM) described in Reg. Sec. 1.460-3(b)(2) if the taxpayer fails to use the PCM in the first taxable year and the succeeding taxable year(s).

The following were added to the List of Automatic Changes to provide additional changes in method of accounting: (a) Section 5.02, relating to changes to comply with Code Sec. 163(e)(3); (b) Section 11.14, relating to depletion; (c) Section 23.02, relating to changes from the mark-to-market method of accounting described in Code Sec. 475 to a realization method of accounting; and (d) Section 25.03, relating to changes in qualification as life/nonlife insurance company under Code Sec. 816(a).

The following sections include a reduced filing requirement of the Form 3115 by qualified small taxpayers: (a) Sections 6.01 and 6.02, relating to a change from an impermissible or permissible method to a permissible method of accounting for depreciation; (b) Sections 6.09 and 6.10, relating to a change in general asset account treatment or a change in method of accounting for depreciation due to a change in the use of MACRS property; (c) Section 6.11, relating to depreciation of qualified non-personal use vans and light trucks; and (d) Section 6.17, relating to a change from impermissible to permissible method of accounting for depreciation or amortization for disposed depreciable or amortizable property.

Effective Date and Transition Rules

Except as provided by the transition rules, Rev. Proc. 2015-13 is effective for Forms 3115 filed on or after January 16, 2015, for a year of change ending on or after May 31, 2014.

A taxpayer may file a Form 3115 to request consent to change a method of accounting under the procedures of Rev. Proc. 97-27 or Rev. Proc. 2015-13 for a taxable year ending on or after November 30, 2014, and on or before January 16, 2015, until March 2, 2015.

A taxpayer may convert a Form 3115 filed under Rev. Proc. 97-27 to a request for consent under Rev. Proc. 2015-13 for the same requested change in method of accounting and year of change if the taxpayer is otherwise eligible to use Rev. Proc. 2015-13 and: (a) the Form 3115 was filed before January 16, 2015, and the Form 3115 is pending with the national office on January 16, 2015, or (b) the Form 3115 was filed on or after January 16, 2015, and on or before March 2, 2015.

A taxpayer may convert a Form 3115 to the non-automatic change procedures, if eligible, by notifying the national office contact person before the later of (a) March 31, 2015, or (b) the issuance of a letter ruling granting or denying consent for the change. A taxpayer may convert a Form 3115 to the automatic change procedures, if eligible, by notifying the national office contact person before the later of (a) March 31, 2015, or (b) the issuance of a letter ruling granting or denying consent for the change. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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