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IRS provides revised procedures for automatic consent to accounting method change

Thomson Reuters Tax & Accounting  

· 8 minute read

Thomson Reuters Tax & Accounting  

· 8 minute read

Rev Proc 2015-13, 2015-5 IRB, Rev Proc 2015-14, 2015-5 IRB

In a new Revenue Procedure, IRS updates and reviseds the procedures under which a taxpayer may obtain automatic consent for a change in an accounting method. It also modifies the general procedures for obtaining IRS’s advance consent to change to an accounting method (nonautomatic consent). A second Revenue Procedure contains a list of automatic changes to which the automatic change procedures apply. The Revenue Procedures are generally effective for Forms 3115 filed on or after Jan. 16, 2015, for a year of change ending on or after May 31, 2014, but some transitional rules apply.

Background. Under Code Sec. 446(e), taxpayers must obtain IRS’s consent before changing a method of accounting for federal income tax purposes. There are two processes, automatic and nonautomatic consent. Some common “automatic consent” changes are those involving: impermissible to permissible accounting method for depreciation; and changes under the recent Code Sec. 162 and Code Sec. 263 capitalization regs. There are generally no user fees for automatic-consent accounting method change requests.

In general, automatic consent to change an accounting method is achieved by (1) filling out Form 3115 (Application for Change in Accounting Method) and attaching it to the timely filed (including extensions) original income tax return for the requested year of change; and (2) sending a copy of the completed form to IRS’s National Office no later than the date that the original Form 3115 is filed with the return for the change year. Unless IRS provides otherwise, a taxpayer not under audit who follows the automatic consent procedures generally gets both audit and ruling protection. That is, IRS will not require the taxpayer to change its method of accounting for the same item for a tax year before the change year (audit protection). It also won’t require the taxpayer to change or modify the new method of accounting except in certain limited circumstances, and, if IRS makes the taxpayer change or modify the new method of accounting, the required change or modification generally won’t apply retroactively (ruling protection). In other words, the taxpayer generally receives protection for the use of the new method of accounting in future years.

Changes to automatic consent procedures. Rev Proc 2015-13 updates and revises the general procedures under Code Sec. 446(e) and Reg. § 1.446-1(e) that taxpayers should use to obtain the 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 successor). Rev Proc 2015-14 provides the List of Automatic Changes to which the automatic change procedures in Rev Proc 2015-13 (or successor) apply.

Rev Proc 2015-13, Sec. 18.01 lists the following as some of the changes affecting Rev Proc 2011-14 (which (as amended and modified) provides guidance on accounting method changes) and/or Rev Proc 97-27, 1997-1 CB 680 (which previously provided guidance on accounting method changes).

(1) Rev Proc 2015-13, Sec. 3.17(2), clarifies the term “taxpayer” in the context of a member of a consolidated group. In the case of a consolidated group, except as otherwise provided inRev Proc 2015-13, “taxpayer” refers to the individual member of the consolidated group for which the change in accounting method is requested or the common parent of the group acting on behalf of that member. For example, to determine eligibility for a window period in Rev Proc 2015-13, Sec. 8.02(1)(a) or Rev Proc 2015-13, Sec. 8.02(1)(b) the length of time a member of a consolidated group has been under examination is calculated at the member level, which may be different from the length of time, if any, the member’s current common parent has been under examination. (Rev Proc 2015-13, Sec. 18.01(6))

(2) Rev Proc 2015-13, Sec. 6.03(1)(a)(ii), Rev Proc 2015-13, Sec. 6.03(1)(a)(iii), Rev Proc 2015-13, Sec. 6.03(3)(b), and Rev Proc 2015-13, Sec. 6.03(3)(c) clarify the rules for how foreign corporations and foreign partnerships that are not required to file a federal income tax return file a Form 3115 and their controlling domestic shareholders and partners comply with the filing and other requirements regarding Forms 3115 and Consent Agreements. (Rev Proc 2015-13, Sec. 18.01(9))

(3) Rev Proc 2015-13, Sec. 7.03(2)(c) modifies the rules for the treatment of a Code Sec. 481(a) adjustment regarding a Code Sec. 381(a) transaction within a consolidated group in which the accounting method that gave rise to a Code Sec. 481(a) adjustment is carried over and used by the acquiring corporation. In that case, the portion of the Code Sec. 481(a) adjustment attributable to the short tax year of the transferor ending on the date of the Code Sec. 381(a) transaction is treated as an intercompany item as defined in Reg. § 1.1502-13(b)(2) and taken into account under the Reg. § 1.1502-13 rules. (Rev Proc 2015-13, Sec. 18.01(10))

(4) Rev Proc 2015-13, Sec. 7.03(3)(b) modifies the Code Sec. 481(a) adjustment period for taxpayers under examination with positive Code Sec. 481(a) adjustments. In that case, the Code Sec. 481(a) adjustment period is two tax years, unless the Form 3115 is filed in a three-month or 120-day window, the present method is not before the director, or the applicant is a new member of a consolidated group in CAP. (Rev Proc 2015-13, Sec. 18.01(11))

(5) Rev Proc 2015-13, Sec. 7.03(3)(c) modifies the de minimis election for a one-year adjustment period for a positive Code Sec. 481(a) adjustment to make it available for a positive Code Sec. 481(a) adjustment that is less than $50,000. (Rev Proc 2015-13, Sec. 18.01(12))

(6) Rev Proc 2015-13, Sec. 7.03(3)(d) provides an optional election for a one-year adjustment period for a positive Code Sec. 481(a) adjustment for taxpayers with an eligible acquisition transaction. Also, Rev Proc 2015-13, Sec. 6.03(4)(b) provides that a taxpayer is not eligible to make a late election except in unusual and compelling circumstances. (Rev Proc 2015-13, Sec. 18.01(13))

(7) Rev Proc 2015-13, Sec. 7.07,, Rev Proc 2015-13, Sec. 7.08,, and Rev Proc 2015-13, Sec. 7.09, provide, consistent with existing practice, additional terms and conditions specific to (a) certain foreign corporations, (b) trades or businesses of a domestic corporation, domestic partnership, or other United States person that affect the amount of foreign source taxable income, and (c) foreign partnerships. (Rev Proc 2015-13, Sec. 18.01(15))

(8) Rev Proc 2015-13, Sec. 8.02(1)(b) is modified to make a CFC or 10/50 corporation ineligible for the 120-day window. (Rev Proc 2015-13, Sec. 18.01(17))

(9) Rev Proc 2015, Sec. 8.02(1)(c), Rev Proc 2015, Sec. 8.02(1)(e), and Rev Proc 2015, Sec. 8.02(1)(f), modify the rules for when a taxpayer under examination filing a Form 3115 may receive audit protection outside of a window period. These rules replace the previous requirement that the taxpayer acquire the director’s statement consenting to the filing of the Form 3115 prior to filing the Form 3115.

(10) Rev Proc 2015-13, Sec. 12.02(2) clarifies the rules for a Code Sec. 481(a) adjustment to provide that if the director makes a correction to the amount of the Code Sec. 481(a) adjustment, ordinarily the director will take the entire amount of the correction into account for the earliest tax year in the Code Sec. 481(a) adjustment period that is under examination, regardless of whether the statute of limitations on the assessment of tax under Code Sec. 6501 has not expired for one or more taxable years in the adjustment period. (Rev Proc 2015-13, Sec. 18.01(21))

(11) Rev Proc 2015-13, Sec. 18.02(6.01), modifies Rev Proc 2011-14, Sec. 6.02(1) to require taxpayers to file a Form 3115 in all cases when requesting consent under the automatic change procedures. However, when permitted in the applicable section of the List of Automatic Changes, a taxpayer may file a short Form 3115. (Rev Proc 2015-13, Sec. 18.02(3))

(12) Rev Proc 2015-13, Sec. 11.03(2)(c) modifies Rev Proc 97-27, Sec. 8.11, to generally invalidate a Consent Agreement if the taxpayer does not implement the change in method of accounting by the later of either the due date of the taxpayer’s federal income tax return for the taxable year succeeding the year of change or one year from the date of issuance of the letter ruling. (Rev Proc 2015-13, Sec. 18.03(2))

(13) Rev Proc 2015-13, Sec. 13.01(1)(b), modifies the rules for revising the year of change to provide that, if a taxpayer files its Form 3115 on or before the last day of the sixth month of the year of change, it may submit a written request to revise the year of change on or after, but not before, the first day of the tax year following the original year of change. (Rev Proc 2015-13, Sec. 18.03(3))

Rev Proc 2015-13, except as noted in Rev Proc 2015-13, Sec. 16, supersedes (after modifying, clarifying, and amplifying) Rev Proc 2011-14, 2011-4 IRB 330. Rev Proc 97-27is also superseded.

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.

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