IRS Modifies Rules for Filing Accounting Method Changes and Procedures for Taxpayers Under Examination

Editor: Kevin D. Anderson, CPA, J.D.

Tax Accounting

On Jan. 16, the IRS released Rev. Proc. 2015-13, which provides the exclusive procedures for taxpayers to obtain both automatic and advance consent for a change in method of accounting. Rev. Proc. 2015-13 amplifies, clarifies, modifies, and supersedes, in part, Rev. Proc. 2011-14, the previous exclusive revenue procedure for all automatic consent accounting method changes. This revenue procedure also clarifies, modifies, and supersedes Rev. Proc. 97-27, the long-standing revenue procedure for advance consent (or nonautomatic) accounting method changes.

The highlights of Rev. Proc. 2015-13 are the addition of several new procedural rules for filing method changes, including, among other things, significant changes for taxpayers under examination to file method changes, shortened Sec. 481(a) adjustment periods, and a new requirement to mail the automatic change copy to the IRS office in Ogden, Utah, rather than the IRS National Office. Concurrently with the release of Rev. Proc. 2015-13, the IRS also released Rev. Proc. 2015-14, which contains the updated list of automatic accounting method changes. This revenue procedure adds new terms and conditions to existing automatic changes and provides for several new automatic changes.

Rev. Procs. 2015-13 and 2015-14 are effective for Form 3115, Application for Change in Accounting Method, requests filed on or after Jan. 16, 2015, for a year of change ending on or after May 31, 2014. However, the IRS provided a modified transition rule that permits a taxpayer to file an automatic Form 3115 request for a tax year ending on or after May 31, 2014, and on or before Jan. 31, 2015, under either Rev. Proc. 2011-14 or the new Rev. Proc. 2015-13. Rev. Proc. 2015-13 modifies Rev. Procs. 2011-14 and 97-27 in many areas, but the rest of this item highlights the more significant developments.

Taxpayers Under Examination

Before the issuance of Rev. Proc. 2015-13, a taxpayer that was under IRS examination as of the date the taxpayer filed Form 3115 generally could not file the change unless it filed within the 90-day or 120-day window, obtained director consent, filed an automatic change that lacked audit protection, or filed for an issue pending. In many cases, these limitations severely restricted taxpayers from changing from impermissible to permissible methods of accounting. Now, under Rev. Proc. 2015-13, a taxpayer under examination is able to file a Form 3115 at any time while under examination. However, the taxpayer will not receive audit protection for the same item that is the subject of a Form 3115 for tax years before the year of change unless it meets any of the following six listed exceptions:

1. Change filed in a three-month window: A taxpayer under examination for at least 12 consecutive months may file a Form 3115 in the three-month window (formerly known as the 90-day window), provided that the method change being requested is not an issue under consideration. The “three-month window”is the period beginning on the 15th day of the seventh month of the tax year and ending on the 15th day of the 10th month of the tax year. The months are modified in the case of a short tax year.
2. Change filed in a 120-day window: A taxpayer under examination may file a Form 3115 in the 120-day period following the date an examination ends, regardless of whether a subsequent examination has commenced, provided that the method change being requested is not an issue under consideration. This exception is not available for a controlled foreign corporation (CFC) or a noncontrolled Sec. 902 corporation (commonly referred to as a 10/50 corporation).
3. Present method not before the director: This exception allows a taxpayer under examination to file a Form 3115 either to change from a clearly permissible method, or to change from an impermissible method and the impermissible method was adopted after the tax year(s) under examination.
4. New member of a consolidated group in CAP: This exception allows the common parent of a consolidated group that is participating in the Compliance Assurance Process (CAP) to file a Form 3115 on behalf of a new member for the tax year it joins the group, provided that the new member is not itself under examination and the method change being requested is not an issue under consideration.
5. Change resulting in a negative Sec. 481(a) adjustment: This exception allows a taxpayer under examination to file a Form 3115 for an item that results in a negative Sec. 481(a) adjustment for the year of change and would have resulted in a negative Sec. 481(a) adjustment in each tax year under examination if the method change for that item had been made during the years examined.
6. No examination-imposed change and item not under consideration: A taxpayer under examination for one or more tax years on the date it files a Form 3115 receives audit protection if, by the earliest date that any of those examinations end, the examining agent does not propose an adjustment for the same item that is the subject of the Form 3115 for the tax years under examination and the method change being requested is not an issue under consideration. For this particular exception, Rev. Proc. 2015-13 also provides that the period over which a positive Sec. 481(a) adjustment is spread is two tax years (i.e., the year of change and the next tax year) rather than four tax years.

Shortened Sec. 481(a) Adjustment Periods

Rev. Proc. 2015-13 introduces two new elections relating to a shortened Sec. 481(a) adjustment period. First, a taxpayer may elect a one-year Sec. 481(a) adjustment period for all, but not some, positive Sec. 481(a) adjustments for the year of change if an “eligible acquisition transaction” occurs during the year of change or in the subsequent tax year on or before the due date, including extensions, for filing the federal income tax return for the year of change. In the case of a corporation that is not an S corporation (including a CFC), an eligible acquisition transaction means (1) another party’s acquisition of a stock ownership interest in the taxpayer that either results in the acquisition of control of the taxpayer or causes the taxpayer’s tax year to end, or (2) an acquisition of assets in a transaction to which Sec. 381(a) applies.

For all other taxpayers, an eligible acquisition transaction means another party’s acquisition of an ownership interest in the taxpayer that does not cause the taxpayer to cease to exist for tax purposes (e.g., the sale or exchange of a partnership interest that does not cause a technical termination of the partner). To make this “eligible acquisition transaction election,” the taxpayer must file, in duplicate, the election statement containing the required information. Once made, the election is irrevocable and applies to all method changes made under the revenue procedure for the year of change.

Second, Rev. Proc. 2015-13 provides a de minimis election whereby a taxpayer may elect to take into account entirely in the year of change a positive Sec. 481(a) adjustment that is less than $50,000 (this amount was increased from $25,000).

Implications

Taxpayers and practitioners should pay close attention to these revenue procedures when preparing to file accounting method changes, as certain procedures and terms and conditions that have been in place for many years have either been significantly or slightly modified. For nonautomatic Form 3115 requests, the changes under Rev. Proc. 2015-13 take effect immediately. For automatic Form 3115 requests filed for a tax year ending on or after May 31, 2014, and on or before Jan. 31, 2015, the request can be filed under either Rev. Proc. 2011-14 or Rev. Proc. 2015-13. For that tax year of change only, taxpayers should determine whether it is more advantageous to file a Form 3115 under Rev. Proc. 2015-13. Going forward, for a tax year ending after Jan. 31, 2015, all automatic Form 3115 requests must be filed under Rev. Proc. 2015-13.

EditorNotes

Kevin Anderson is a partner, National Tax Office, with BDO USA LLP in Bethesda, Md.

For additional information about these items, contact Mr. Anderson at 301-634-0222 or kdanderson@bdo.com.

Unless otherwise noted, contributors are members of or associated with BDO USA LLP.