Taxpayers must obtain the IRS’s consent to change any of their accounting methods under Code Sec. 446(e). The IRS has updated and made changes to its revenue procedures for obtaining IRS consent. In Rev. Proc. 2015-13, the IRS has updated the general procedures for taxpayers to obtain either advance consent or automatic consent to change their accounting methods. In Rev. Proc. 2015-14, the IRS has described the accounting methods for which taxpayers can obtain automatic consent to change their method.
These procedures provide the roadmap for taxpayers to consult when changing an accounting method. For any change, taxpayers must submit Form 3115, Application for Change in Accounting Method. However, the timing for submitting the form depends on the change and the type or consent. Advance consent requires that the taxpayer file Form 3115 with the IRS and wait to obtain consent before making any changes. Automatic consent allows the taxpayer to make the changes on its own and to file Form 3115 in the year after the year of change.
Rev. Proc. 2015-13 updates and supersedes the procedures that were in Rev. Proc. 2011-14 (automatic consent procedures) and Rev. Proc. 97-27 (advance consent procedures). The procedures clarify and modify rules for changing accounting methods in several dozen areas. Rev. Proc. 97-27 is superseded. However, certain provisions of Rev. Proc. 2011-14 remain in effect. Generally, the changes are effective for Forms 3115 filed on or after January 16, 2015 for a year of change ending on or after May 31, 2014. Transition rules apply for certain automatic changes.
The significant changes made by Rev. Proc. 2015-13 include provisions that:
- Clarify that an issue is under consideration as of the date of the operative written notification to the taxpayer, and that an item ceases to be an issue under consideration after an examination ends unless the examining agent provides the taxpayer with written notification that the item is an issue placed in suspense;
- Modify the rules for when a taxpayer under examination may file a Form 3115 by replacing “issue pending” and “consent of director” in with broad eligibility rules; and
- Modify 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 tax year 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 Rev. Proc. 2015-14, the IRS highlighted significant changes to its list of accounting methods for which automatic consent is available, including:
- Research and experimental (R&E) expenditures under Code Sec. 174;
- Reasonable allocation methods for self-constructed assets;
- Changes from the cash to an accrual method for specific items;
- Long-term contracts;
- Trade and business expenses including materials/supplies and repairs/maintenance; and
- Computing ending inventory under the retail inventory method
The necessity of implementing a change in a method of accounting based on current and changing IRS procedures is generally a situation faced by any business over the course of several years. This frequency has been accelerated for many more businesses recently because of requirements – and opportunities – connected with those situations listed above, and more.
Please contact this office if you have any concerns over how these new procedures impact your business.