Accounting Method Change Procedures: One Possible Solution

By Richard Shevak, J.D., Washington, DC

Editor: Greg A. Fairbanks, J.D., LL.M.

The current nonautomatic procedures for obtaining the Service’s consent to change an accounting method for federal in come tax purposes require a taxpayer to file a Form 3115, Application for Change in Accounting Method, during the tax year of change (see Regs. Sec. 1.446-1(e)(3)(i); Rev. Proc. 97-27, Section 5.01(a)). While there is no official guidance binding the IRS to review a Form 3115 within a particular time period, taxpayers generally expect the Service to review and respond to Forms 3115 before the extended due date for filing the taxpayer’s income tax return. Unfortunately, given the backlog of method change requests, the IRS is not always able to respond to a taxpayer’s requests by that date.

A taxpayer that has not received a response to its Form 3115 by the extended due date has to make a choice: (1) use the proposed accounting method on the return for the year of change before receiving consent and amend the return in the event consent is not granted; or (2) wait for consent agreement and file an amended return when consent is received.

Rev. Proc. 2007-1 mostly addresses this situation. Section 9.17 of Rev. Proc. 2007-1 states that a taxpayer must re ceive consent before implementing a change in accounting method. However, the revenue procedure goes on to state:

[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 . . . 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 If, however, the requested change is modified or is withdrawn, denied, or similarly closed without the Associate office having granted consent, taxpayers are not relieved of any interest, penalties, or other adjustments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 the improper implementation of the change. [Emphasis added.]

On the other hand, if permission is granted, and if the taxpayer filed its return before receiving consent, the revenue procedure states that “the photocopy of the signed Consent Agreement copy of the letter ruling should be attached to the amended return for the year of change that the taxpayer files to implement the change in accounting method.” Unfortunately, instead of creating a system that requires the IRS to provide timely feedback, the revenue procedure places the taxpayer in the unfortunate position of having to choose between two imperfect options.

Of course, the above issue does not exist for method changes requested under the automatic method change procedures because, barring any IRS intervention, the permission of the Commissioner is deemed granted.

In response to the above problems relating to delays in processing nonautomatic method change requests, in late 2006 the IRS invited both the AICPA and the American Bar Association (ABA) to provide suggestions to help the IRS National Office accelerate the processing of accounting method change requests in order to reduce or eliminate the current backlog. The AICPA and the ABA suggested certain material changes (not addressed in this item).

Notice 2007-88

On October 19, 2007, after considering the AICPA and ABA comments, the IRS issued Notice 2007-88, which describes a proposed pilot program that, when implemented, would provide revised procedures for receiving the Commissioner’s consent to change accounting methods. Unfortunately, the notice does not actually implement any new procedures; instead it announces that the IRS is considering a revision of current procedures and that the pro posal in the notice is merely one possible solution.

If implemented, the pilot program would require the use of one of three processes: (1) the standard consent pro cess, (2) the specific consent process, or (3) the letter ruling consent process.

Standard consent: The standard consent process would operate in a manner similar to the current automatic procedure and would be used to process most method changes. Assuming applicable scope limitations are met, the standard consent process would be available for all method changes except those specifically identified by the IRS as subject to the specific consent process. The standard consent process would be the only procedure available for those changes currently identified in the automatic method change revenue procedure or other guidance. A taxpayer requesting permission for a method change not specifically identified in Rev. Proc. 2002-9 (or other guidance permitting an automatic method change) would receive only audit protection for years before the requested year of change and would not receive ruling protection.

While the standard consent process gives taxpayers the ability to easily request and implement changes in accounting method, the lack of ruling protection may prove unsatisfying. For those taxpayers that need more certainty, the letter ruling consent process (described below) would be preferable. As part of the standard consent process, the IRS is considering one alternative that would require a taxpayer to file a Form 3115 for method changes not specifically identified in Rev. Proc. 2002-9 (or other automatic method change guidance) by the last day of the ninth month of the taxpayer’s tax year.

Specific consent: The specific consent process would be available for only two categories of accounting method changes: (1) accounting method changes specifically identified in published guidance as required to be made under the specific consent process; and (2) changes that otherwise qualify under the standard consent process but for which the taxpayer seeks different terms and conditions or seeks a waiver of certain scope limitations. Method changes specifically identified by the IRS would include changes that the IRS wants to review in more depth before taxpayer implementation on a return.

The process for requesting specific consent would be similar to the current process under Rev. Proc. 97-27 except that the request would be due by the last day of the ninth month of the taxpayer’s tax year without the possibility for relief under Regs. Sec. 301.9100. Under the specific consent process, a taxpayer would receive both audit and ruling protection for those changes specifically identified as subject to the specific consent process; a taxpayer would receive only audit protection when it used the specific consent pro cess in order to modify terms and conditions or waive scope limitations.

Letter ruling consent: Finally, a taxpayer may request the certainty of a letter ruling for any change other than those identified in Rev. Proc. 2002-9 (or a successor revenue procedure). The letter ruling consent process would be subject to the user fee imposed on letter ruling requests (currently $10,000) and not the reduced fee for advance consent requests. A request under the letter ruling process would be due by the last day of the ninth month of the requested tax year without the possibility of relief under Regs. Sec. 301.9100.

Request for Comments

The IRS notes that the proposal in Notice 2007-88 is one way, but not the only way, that the IRS could address the current backlog of change in accounting method requests. The IRS requests comments on the proposal and any other suggestions for modifying and improving the accounting method change process. The deadline for submitting comments is January 18, 2008.


As discussed above, Notice 2007-88 merely announces one possible solution to the current problems of delays in processing nonautomatic method changes. While there may be differences of opinion as to how such method changes should ultimately be processed, improvements to the current system are needed.


Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLP, Washington, DC.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

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