IRS Provides Procedures to Request Revision to Year of Change for Form 3115

By Natalie Tucker, CPA, MTA, Jacksonville, FL

Editor: Nick Gruidl, CPA, MBT

With the passing of April 15, many practitioners will shift their attention to taxpayers under extension, some of which may have advance consent accounting method changes outstanding. On November 6, 2007, the IRS issued Rev. Proc. 2007-67, providing procedures for taxpayers, under certain conditions, to request to revise the year of change for a pending Form 3115, Application for Change in Accounting Method.

Background

A taxpayer is generally not permitted to change its method of accounting without IRS consent, even if the taxpayer has an advance consent accounting method change request pending with the IRS National Office (Sec. 446(e); Regs. Sec. 1.446-1(e)(2)(i)). Section 9.17 of Rev. Proc. 2008-1 specifically provides:

For an advance consent accounting method change, a taxpayer has secured the consent of the Commissioner when it timely signs and returns the Consent Agreement copy of the letter ruling from the Associate office granting permission to make the accounting method change. A taxpayer that timely files an advance consent accounting method change request and takes the change into account in its Federal income tax return for the year of change (and any subsequent tax year), prior to receiving the letter ruling granting permission for the requested change, may nevertheless rely on the letter ruling received from the Associate office after it is received, as provided in section 9.19 of this revenue procedure. If, however, the requested change is modified or is withdrawn, denied, or similarly closed without the Associate office having granted consent, taxpayers are not relieved of any interest, penalties, or other adjustments resulting from improper implementation of the change.

If an advance consent method change request is pending when the tax return for the proposed year of change is filed, the taxpayer and its tax adviser must assess the likelihood of IRS approval prior to implementing the proposed method in order to avoid the administrative burden of filing amended returns. In making this assessment, the taxpayer should consider all prior communications with the Service and the authority supporting the adoption of the proposed method.

Practice tip: It is important to note that because Sec. 446(e) and Regs. Sec. 1.446-1(e) require a taxpayer to continue to use the present method until IRS consent is received (because the statute and regulations require consent, not just asking for consent), the filing of a return adopting the proposed method change before consent is received is contrary to the regulations. Accordingly, a practitioner should consider whether adopting a proposed method change on a return before IRS consent is obtained should include a Form 8275-R, Regulation Disclosure Statement. If the practitioner is unable to conclude that the proposed method change will more likely than not be approved, the return should be filed using the present method and an amended return filed when IRS consent is received.

Therefore, in situations in which a taxpayer has not received IRS consent for an advance consent accounting method change (i.e., a Form 3115 filed under Rev. Proc. 97-27) by the extended due date of its tax return for the proposed year of change, it is generally advisable for the taxpayer to file its tax return using its present method of accounting and then amend its return to use the proposed method of accounting once its request is granted.

Details Behind the New Guidance

Under Rev. Proc. 2007-67, the written request is due on or after, but not before, the first day of the fourth month following the month in which the tax return is due (without regard to extension) for the original year of change requested on the Form 3115 (Rev. Proc. 2007-67, §12.01(1)).

Example: A, a calendar-year corporation, files an advance consent accounting method change for 2007. By mid-2008, A still has not received IRS consent to its requested change. As a result, it decides to continue to use its present method of accounting on its 2007 tax return and to request consent to delay the year of change to 2008 to avoid having to file an amended return. Its written request to delay the year of change from 2007 to 2008 is due on or after July 1, 2008.

If the requested change in accounting method is not one that will be effected using a cutoff method, the taxpayer must agree to accelerate into the revised year of change the percentage of any net positive Sec. 481(a) adjustment that would have been taken into account if the year of change had not been revised (Rev. Proc. 2007-67, §12.01(3)(a)). In A’s case, because A is revising its year of change from 2007 to 2008, it must recognize half of the Sec. 481(a) adjustment in 2008, one-quarter in 2009, and one-quarter in 2010.

If a taxpayer wants to request to revise the year of change prior to the permitted filing date (e.g., prior to July 1 in A’s case), it must demonstrate compelling circumstances to do so (Rev. Proc. 2007-67, §12.03(1)). The Service reserves the right to deny a taxpayer’s request if the IRS determines that it would not be in the best interest of sound tax administration to allow the taxpayer to revise the year of change (Rev. Proc. 2007-67, §12.06). In addition, a taxpayer is not entitled to a conference with the Service if its request is denied. Rev. Proc. 2007-67 is effective for Forms 3115 filed on or after, or pending in the IRS National Office on, November 6, 2007. A transition rule also applies for certain pending consent agreements. If before November 27, 2007, a taxpayer received a letter ruling approving a change in accounting method for which the taxpayer has not signed and returned the consent agreement, and the period of time for signing and returning the consent agreement has not expired, the taxpayer may request to revise the year of change under Rev. Proc. 2007-67. However, the taxpayer must submit its request to revise the year of change prior to, and within the period of time for, signing and returning the consent agreement.

Implications

Taxpayers generally prefer to avoid filing amended returns. Rev. Proc. 2007-67 offers relief for taxpayers with changes pending as their returns become due.


EditorNotes

Nick Gruidl, CPA, MBT, Managing Director, National Tax Department, RSM McGladrey, Inc., Minneapolis, MN

Unless otherwise indicated, contributors are members of RSM McGladrey, Inc.

If you would like additional information about these items, contact Mr. Gruidl at (952) 893-7018 or nick.gruidl@rsmi.com.

Newsletter Articles

AWARD

James M. Greenwell Wins 2014 Best Article Award

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

 

FEATURE

How Legal Marijuana Businesses Are Treated Federally

This article examines the tax problems that these businesses face and warns that professionals may provide services to them at their peril.