Previous Page: Publication 538 - Accounting Periods and Methods - Inventories Next Page: Publication 538 - Accounting Periods and Methods - How To Get Tax Help Use   to find additional occurrences of topic items.

taxmap/pubs/p538-006.htm#TXMP3eec20e2 Change in   Accounting Method

Accounting Method, Change

You can generally choose any permitted accounting method when you file your first tax return. You do not need IRS approval to choose the initial method. You must, however, use the method consistently from year to year and it must clearly reflect your income. See Accounting Methods, earlier.

Once you have set up your accounting method and filed your first return, you generally must get IRS approval before you change the method. In general, you must file a current Form 3115 to request a change in either an overall accounting method or the accounting treatment of any item.

A change in your accounting method includes a change not only in your overall system of accounting but also in the treatment of any material item. A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Although an accounting method can exist without treating an item consistently, an accounting method is not established for that item, in most cases, unless the item is treated consistently.

taxmap/pubs/p538-006.htm#TXMP2fa19dc0 Approval required.

The following are examples of changes in accounting method that require IRS approval.

• A change from the cash method to an accrual method or vice versa.
• A change in the method or basis used to value inventory.
• A change in the depreciation or amortization method (except for certain permitted changes to the straight-line method).

taxmap/pubs/p538-006.htm#TXMP105e882e Approval not required.

The following are examples of types of changes that are not changes in accounting methods and do not require IRS approval.

• Correction of a math or posting error.
• Correction of an error in figuring tax liability (such as an error in figuring a credit).
• An adjustment of any item of income or deduction that does not involve the proper time for including it in income or deducting it.
• Certain adjustments in the useful life of a depreciable or amortizable asset.

taxmap/pubs/p538-006.htm#TXMP1748011e IRS Approval

IRS Approval

The following are the two ways you can get IRS approval to change an accounting method.

• Automatic change request procedures.
• Advance consent request procedures.

If your current method clearly reflects your income, the IRS will weigh the need for consistency in reporting against the request for change.

If you do not request IRS approval to change an accounting method, the absence of IRS approval will not be accepted as a defense to any penalty.

taxmap/pubs/p538-006.htm#TXMP1ea3a616 Automatic Change Request Procedures

Automatic Change Request Procedures

You may use the automatic change request procedures to make a change in method of accounting if you meet both of the following conditions.

• Your accounting method change qualifies for the automatic change request procedures for the requested year of change.
• You are eligible to use the automatic change request procedures. For further information, see Eligibility for automatic change requests, later.

Generally, you must use Form 3115 to request an automatic change. The approval is granted for the tax year for which you request a change (year of change), if the change is provided in an automatic change request procedure for the requested year of change, you are within the scope of the automatic change request procedure, and you comply with all of the provisions of the automatic change request procedure. See Revenue Procedure 2002–9 in Internal Revenue Bulletin 2002–3, as modified by Announcement 2002–17 in Internal Revenue Bulletin 2002–8, Revenue Procedure 2002–19 in Internal Revenue Bulletin 2002–13, and Revenue Procedure 2002–54 in Internal Revenue Bulletin 2002–35. The Appendix to Revenue Procedure 2002–9 describes the various types of accounting method changes that may be made using the automatic change request procedures in Revenue Procedure 2002–9 and provides specific guidance on the terms and conditions that must be met for each specific type of automatic change. Also, see section 9.22 of Revenue Procedure 2004–1 in Internal Revenue Bulletin 2004–1 (or its successor) and the instructions for the current Form 3115. The IRS may occasionally designate in subsequently published guidance additional accounting method changes as qualifying for automatic change request procedures.

taxmap/pubs/p538-006.htm#TXMP6cb32eca Filing Form 3115.

In general, you must file Form 3115 to request approval to change your accounting method under the automatic change request procedures. No user fee is required. File Form 3115 with your return. Your return must be filed by the due date (including extensions). You must also file a copy (with signature) of the completed Form 3115 with the IRS national office no later than when you file the original with your return. The IRS does not acknowledge receipt of Form 3115 for automatic change request procedures.

You can get an automatic extension of 6 months to file Form 3115 by filing it with an amended return. The extension is granted if you file the amended return within 6 months from the due date of the original return for the year of change (excluding extensions) and meet the following conditions.

• You filed your original return for the year of change by the due date (including extensions).
• You use the new method of accounting on the amended return.
• You attach the Form 3115 to the amended return and write "FILED PURSUANT TO REG. 301.9100–2" at the top of the Form 3115.
• You file a copy of the completed Form 3115 with the IRS national office no later than when you file the original with the amended return.

taxmap/pubs/p538-006.htm#TXMP7e785a21 Eligibility for automatic change requests.

The following eligibility limitations do not apply to all automatic changes. For some automatic changes, none of the following limitations apply. For other changes, some of the limitations apply or may apply under specific conditions. A list of the automatic changes for which a Form 3115 must be filed is provided in the instructions for Form 3115. This list identifies each change and indicates if eligibility limitations may not apply for that change. This information is also available in an appendix to Revenue Procedure 2002–9, as modified by later published guidance.

You are not eligible for an automatic change request if any of the following limitations are applicable for the accounting method change you are requesting and apply to you, the applicant (see section 4.02 of Revenue Procedure 2002–9 as modified by section 2.03 of Revenue Procedure 2002–19 for details):

1. Under examination. The applicant is under examination with respect to any income tax issue. This also applies to a member of a consolidated group if the group is under examination for any tax year during which the applicant was a member of the consolidated group. The following exceptions apply to this limitation.
   1. 90-day window period for filing Form 3115. See section 6.03(2) of Revenue Procedure 2002–9 for details.
   2. 120-day window period for filing Form 3115. See section 6.03(3) of Revenue Procedure 2002–9 for details.
   3. You receive permission from the IRS director. See section 6.03(4) of Revenue Procedure 2002–9 for details.
   4. The method to be changed lacks audit protection for years prior to the year of change. See section 6.03(5) of Revenue Procedure 2002–9 for details.
   5. The method to be changed is an issue pending for any tax year under examination. See section 2.03 of Revenue Procedure 2002–19 for details.
2. Partnerships and S corporations. The applicant is a partnership or S corporation requesting to change a method of accounting that is an issue under consideration in an examination, before an appeals office, or before a federal court, with respect to a federal tax return of a partner, member, or shareholder of the entity.
3. Prior change. Within the last 5 tax years (including the year of change), the applicant has made a change in the same method of accounting (with or without IRS approval), or applied to change the same method of accounting without effecting the change.
4. Section 381(a) transaction. The applicant is a corporation that acquired assets in a transaction as the result of a reorganization or a liquidation of a subsidiary. See section 4.02(7) of Revenue Procedure 2002–9 for details, including two exceptions to this limitation.
5. Final year of trade or business. The requested change is for a tax year that is the applicant's final year of trade or business and the applicant is required to include the entire amount of the section 481(a) adjustment in computing taxable income for that year.

If the applicant is not eligible for an automatic change request for reasons other than limitations 1 and 2, above, request the change under the advance consent request procedures of Revenue Procedure 97–27 (see Advance Consent Request Procedures, later.

taxmap/pubs/p538-006.htm#TXMP0042772f Review of automatic change request.

Any automatic change request may be reviewed by the IRS.

taxmap/pubs/p538-006.htm#TXMP0d6b80cc Incomplete Form 3115.

If the IRS reviews your application and determines that your application is not properly completed according to the instructions for a current Form 3115 or the automatic change request procedures, you will be notified and given 30 days from the date of the notification letter to furnish the necessary information. Ordinarily, no extension will be granted to submit information requested on Form 3115. However, the IRS can grant an extension of up to 30 days to furnish the information. Your written request for the 30-day extension must be submitted within the initial 30-day period.

taxmap/pubs/p538-006.htm#TXMP3fe09086 Conference.

If the IRS tentatively determines that you changed your accounting method without complying with Revenue Procedure 2002–9, you can request a conference. See section 10 of Revenue Procedure 2002–9 for more information.

taxmap/pubs/p538-006.htm#TXMP694f929a Advance Consent Request Procedures

Advance Consent Request Procedures

These are the procedures that you must use to get approval to change your accounting method if you do not qualify to use the automatic change request procedures (discussed earlier).

taxmap/pubs/p538-006.htm#TXMP429edcec Filing Form 3115.

You must file Form 3115 during the tax year for which the change is requested. Attach the required user fee. You should file as early in the year as possible to give the IRS enough time to respond to the form before the due date of the return for the year of change. If you do not file a Form 3115 during the year of change, an extension to file the form will be granted only in unusual and compelling circumstances.

The IRS normally acknowledges receipt of a completed Form 3115 within 30 days after the applicant's filing date. See the form instructions if you do not receive an acknowledgment.

taxmap/pubs/p538-006.htm#TXMP4495f810 Eligibility for advance consent requests.

If any of the following limitations apply, the applicant is not eligible for an advance consent request (see section 4.02 of Revenue Procedure 2002–9 as modified by section 2.03 of Revenue Procedure 2002–19 for details):

1. Under examination. The applicant is under examination with respect to any income tax issue. This also applies to a member of a consolidated group if the group is under examination for the tax year that the applicant was a member of the consolidated group. The following exceptions apply to this limitation.
   1. 90-day window period for filing Form 3115. See section 6.01(2) of Revenue Procedure 97–27 for details.
   2. 120-day window period for filing Form 3115. See section 6.01(3) of Revenue Procedure 97–27 for details.
   3. You receive permission from the IRS director. See section 6.01(4) of Revenue Procedure 97–27 for details.
   4. The method to be changed is an issue pending for tax years under examination. See section 2.03 of Revenue Procedure 2002–19 for details.
2. Partnerships and S corporations. The applicant is a partnership or S corporation requesting to change a method of accounting that is an issue under consideration in an examination, before an appeals office, or before a federal court, with respect to a federal tax return of a partner, member, or shareholder of the entity.

taxmap/pubs/p538-006.htm#TXMP0addf4d3 Incomplete Form 3115.

If your application is not properly completed according to the instructions for a current Form 3115 and the provisions of Revenue Procedure 97–27 and Revenue Procedure 2004–1 (or successor), or if supplemental information is needed, you will be notified and given 21 days from the date of the notification letter to furnish the necessary information. If you do not submit the required information within the reply period, the IRS will not process your Form 3115. Ordinarily, no extension will be granted to submit information requested on Form 3115. However, the IRS can grant up to an additional 15 days to furnish the information. Your written request for the 15-day extension must be submitted within the 21-day period.

taxmap/pubs/p538-006.htm#TXMP7a4c07d7 Conference.

If you think the IRS may give an unfavorable response to your request to change your accounting method, you can request a conference when you file Form 3115. The National Office will arrange one before the IRS formally replies to your Form 3115.

taxmap/pubs/p538-006.htm#TXMP0012d3a4 Consent agreement.

Permission to change your accounting method will be provided in a letter ruling that will identify the item(s) being changed, the section 481(a) adjustment (if any), and the terms and conditions under which the change is to be effected for the tax year specified in the letter ruling. If you agree with the terms and conditions in the letter ruling, you must sign and date the consent agreement copy. The signed copy of the letter ruling will constitute a "consent agreement." The consent agreement must be returned to the IRS within 45 days of the date of issuance. A copy of the consent agreement must be attached to your income tax return for the year of change and you must implement the change in accounting method in accordance with the terms and conditions of the consent agreement. If you file your income tax return for the year of change before you receive the letter ruling and return the signed consent agreement, you should attach the copy of the signed consent agreement to your amended return for the year of change that you file to implement the change in accounting method.

taxmap/pubs/p538-006.htm#TXMP7bfd57e0 More information.

For more information, see the instructions for Form 3115; Revenue Procedure 97–27, as modified by Revenue Procedure 2002–19 and Revenue Procedure 2002–54; and Revenue Procedure 2004–1, particularly section 9.

Previous Page:  Publication 538 - Accounting Periods and Methods - Inventories Next Page:  Publication 538 - Accounting Periods and Methods - How To Get Tax Help Use   to find additional occurrences of topic items.