Notice 96-40: possible changes to procedures to request accounting method changes under Rev. Proc. 92-20: October 18, 1996.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 5,000 members represent more than 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works - one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues arising from the procedures for accounting method changes.

Overview

Rev. Proc. 92-20 was issued by the IRS to update and supersede Rev. Proc. 84-74.(4) The purpose of Rev. Proc. 92-20 is to encourage prompt compliance with proper tax accounting principles and to discourage taxpayers from delaying the filing of applications for permission to change from impermissible methods. Through a gradation of incentives, the 1992 rules supply strong inducements for taxpayers both voluntarily and quickly to correct impermissible methods of accounting. The graded incentives provide less favorable treatment for taxpayers compelled to change accounting methods upon examination. Furthermore, the rules provide various window periods within which voluntary accounting method changes may be secured, following contact for examination but before a compulsory change imposed by the Commissioner.

TEI believes that there is definite need to revise Rev. Proc. 92-20. Concededly, where an accounting method falls within one of the enumerated categories of "A," "B," "Designated A," "Designated B," or LIFO methods, the procedure provides clear guidelines for securing consent of the Commissioner. In contrast, the task of distinguishing among permissible and erroneous methods - i.e., pigeonholing a particular method into one of the enumerated categories - remains a factual undertaking, subject to misinterpretations, errors, and good faith differences of opinion. Hence, whereas the disposition of the relevant tax attributes involved in voluntary accounting method changes (i.e., the "year of change" and income adjustment spread period under section 481) are clearly delineated, the boundaries between permissible and impermissible methods are as fuzzy as ever. Indeed, departures from required accounting methods are frequently a result of unintentional misinterpretation of the law (or facts) or are attributable to a lack of timely published guidance from the IRS. This is especially the case where there is a delay in guidance critical to the implementation of a statutory change or where there is a dispute about proper accounting treatment that is so substantial that it will require litigation to resolve. Hence, the various categories of accounting methods within Rev. Proc. 92-20 raise the stakes for taxpayers' misapprehending (or, indeed, not being aware of) the propriety of an accounting method and, thus, undermine IRS's goal of increasing voluntary changes of accounting method.

Moreover, the procedure assigns precious little weight to the concept of substantial compliance.(5) Where there is uncertainty about whether a particular accounting method is a Category A or B method, taxpayers will generally refrain from seeking a voluntary change rather than risk a retroactive adjustment. In addition, if taxpayers discover that they are using a questionable method during a period after the voluntary change windows are closed, they may choose to perpetuate use of that method rather than face the uncertain or more onerous terms and conditions that may be imposed by an examining agent or appeals officer. The incentive to temporize in respect of methods discovered to be erroneous is particularly acute for Coordinated Examination Program (CEP) taxpayers whose only options for consideration of a method change in a nonadversarial setting are the 120- or 30-day windows.(6)

Finally, subsection 10.12 of Rev. Proc. 92-20 provides that if the taxpayer timely files a Form 3115 with the National Office, an examining agent may not propose that a taxpayer change the same method of accounting for a year prior to the year of change prescribed under the procedure. Hence, taxpayers complying with the procedure are generally accorded "back-year" protection against involuntary changes by the IRS in addition to prospective effect for the change in accounting method. Where a taxpayer's requested change is not granted by the National Office, however, the automatic back year protection is forfeited. Regrettably, this feature undermines the key protection - and incentive - accorded to taxpayers by Rev. Proc. 92-20 and opens the door to substantial disputes. All too often subsequent to the submission of Form 3115 by a taxpayer to the National Office, agents seek to raise the same accounting method issue in an earlier examination cycle. Moreover, given the consultations between field agents and the National Office in respect of accounting method changes initiated by CEP taxpayers, the opportunity for field agents to influence the disposition of the taxpayer's request for voluntary change - and thereby vitiate the protection intended by subsection 10.12 - cannot be discounted. Thus, the perception, if not the reality, that the taxpayer's voluntary request for a prospective change will result in a retroactive change retards compliance. We urge that the policy of affording taxpayers "back-year" audit protection not only be reaffirmed, but reinforced in successor guidance to Rev. Proc. 92-20.

Specific Comments

1. Definitions. Rev. Proc. 92-20 generally provides that a taxpayer may request a method change within 90 days of the beginning of an examination. Subsection 3.02 of the procedure states that a taxpayer is under examination when it has been contacted "in any manner" by a representative of the IRS. Consequently, since most large enterprises are under continuous audit as part of the CEP program (and, thus, are in constant contact with the examination team), they are effectively precluded from using the 90-day window. TEI believes that the definition of "under examination" for a CEP taxpayer should be modified. Specifically, TEI recommends that an examination of a particular year or years be deemed to commence with the opening conference with the case manager or team coordinator. This approach would be consistent with Rev. Proc. 94-69.(7) Under that procedure, the District Director advises a CEP taxpayer by letter of its rights to make additional disclosures under section 6662 and sets the date on which that procedure's 15-day disclosure window begins. This change would permit CEP taxpayers to avail themselves of the 96-day window.

   Subsection 3.02 also states that an examination is considered to end when a taxpayer requests consideration by an appeals officer or federal court. TEI recommends that language be clarified to state that the examination is deemed to end on the date the taxpayer files its protest, files a petition in Tax Court, or pays an assessment.

2. Thirty-day Window. Under subsection 6.04, taxpayers under examination for a continuous period of 18 months may use a...