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IRS issues new draft of accounting method change Form 3115

Click here for draft Form 3115, Application for Change in Accounting Method (Rev. December 2015).

IRS has issued a draft of a revised Form 3115, Application for Change in Accounting Method, which contains a few changes from the current version. It is anticipated that the bulk of the changes with respect to the form will be contained in the instructions to the form, a draft of which has not yet been issued.

Background. Under Code Sec. 446(e), taxpayers must obtain IRS’s consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its method of accounting must apply and secure the prior consent of IRS. For some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. In general, a taxpayer uses Form 3115 for an accounting method change.

Rev Proc 2015-13, 2015-5 IRB, issued by IRS in January 2015 (see Weekly Alert ¶  28  01/22/2015), updated and revised the general procedures under Code Sec. 446(e) and Reg. § 1.446-1(e) that taxpayers should use to obtain IRS’s consent to change an accounting method for federal income tax purposes. Specifically, Rev Proc 2015-13 provides the general procedures to obtain an advance (non-automatic) IRS consent and the procedures to obtain an automatic IRS consent to change an accounting method described in Rev Proc 2015-14, 2015-5 IRB (or a successor to it). Rev Proc 2015-13 modified and consolidated procedures previously contained in Rev Proc 2011-14, 2011-4 IRB 330 (for automatic accounting method changes) and Rev Proc 97-27, 1997-1 CB 680 (for non-automatic accounting method changes). Rev Proc 2015-13 is generally effective for Forms 3115 filed on or after Jan. 16, 2015, for a year of change ending on or after May 31, 2014.

Thereafter, IRS recognized that some taxpayers may have already prepared a Form 3115 for their 2014 tax year with the expectation of using the procedures in Rev Proc 2011-14. It then revised Rev Proc 2015-13 to provide that those taxpayers may elect to file Forms 3115 under the procedures in Rev Proc 2011-14, rather than under the procedures in Rev Proc 2015-13. See Weekly Alert ¶  38  02/05/2015 .

And, in Rev Proc 2015-33, 2015-24 IRB (see Weekly Alert ¶  5  06/04/2015), IRS made revisions to both the effective date and the method change rules of Rev Proc 2015-13. Under the effective date change, a taxpayer may request an automatic change under the procedures of Rev Proc 2011-14 or Rev Proc 2015-13 for a tax year ending on or after May 31, 2014 and beginning before Jan. 1, 2015.

Included among the method change rules in Rev Proc 2015-13 and Rev Proc 2015-33 are:

…Code Sec. 381(a) governs the treatment of a transferor corporation’s accounting methods by a transferee in certain transactions. Rev Proc 2015-33, Sec. 4 provides that a taxpayer that engages in a Code Sec. 381(a) transaction within the year of change may not use the automatic change procedures with respect to principal method changes prescribed by Reg. § 1.381(c)(4)-1(d)(1) or Reg. § 1.381(c)(5)-1(d)(1) .
…Before the existence of Rev Proc 2015-13, taxpayers could make an election to take the entire Code Sec. 481(a) adjustment (in general, an adjustment made in any year in which the taxpayer computes taxable income under a different accounting method from that used in the preceding year to prevent items from being duplicated or omitted) that resulted from a method change into income if it was positive amount less than $25,000. Rev Proc 2015-13, Sec. 7.03(3)(c) modified this “de minimis election” to make it available for a positive Code Sec. 481(a) adjustment that is less than $50,000. Rev Proc 2015-13, Sec. 7.03(3)(d) provided an optional election for a one-year adjustment period for a positive Code Sec. 481(a) adjustment for taxpayers with an “eligible acquisition transaction.”
…With several exceptions, when a taxpayer timely files a Form 3115, IRS will not require the taxpayer to change its method of accounting for the same item for a tax year prior to the requested year of change. This rule is sometimes referred to as the “audit protection” rule. Rev Proc 2015-13 made changes to those exceptions and also withdrew the previous audit protection rule requirement that the taxpayer acquire a statement from an IRS director consenting to the filing of the Form 3115 prior to filing the Form 3115.

Draft Form 3115’s changes. Draft Form 3115 contains changes that reflect those contained in Rev Proc 2015-13 and Rev Proc 2015-33, as well as a few other changes, which include:

1. Removing some general questions about Code Sec. 381, and replacing them with questions that are specific to Reg. § 1.381(c)(4)-1(d)(1) and Reg. § 1.381(c)(5)-1(d)(1) (Question 5);
2. Restating the questions with respect to the audit protection rules to reflect the changes made by Rev Proc 2015-13 and asking taxpayers who have audit protection to list the rule under which they qualify for that protection (Question 7);
3. Changing the application of the question that requires the taxpayer to attach an explanation of his legal basis supporting the proposed method, from being required only of taxpayers making a non-automatic change request, to being required of all Form 3115 filers (Question 16);
4. Restating the “recognize a Code Sec. 481(a) adjustment in the year of change” rule to reflect the abovementioned change in Rev Proc 2015-13(Question 27); and
5. Throughout the form, changing its terminology when referring to non-automatic change requests, from “advance consent requests” to “non-automatic change requests.”
RIA observation: As noted above: 1) many of the changes in the draft form reflect changes made by Rev Proc 2015-13 or Rev Proc 2015-33; and 2) the use of the rules of Rev Proc 2015-13 and Rev Proc 2015-33 is optional for certain tax years. Thus, it seems likely that the instructions to the new Form 3115 will provide that the new form is only to be used for tax years with respect to which the rules of Rev Proc 2015-13 and Rev Proc 2015-33 apply either mandatorily or by the taxpayer’s election.

References: For accounting method changes, see FTC 2d/FIN ¶  G-2100  et seq.; United States Tax Reporter ¶  4464.21  ; TaxDesk ¶  442,400  et seq.; TG ¶  6300  et seq.