Change in accounting method by filing an amended return.

• Author: Leibtag, Bernard

The IRS generally requires taxpayers who want to change their method of accounting to request permission. (See Sec. 446(e) and the related regulations and Rev. Proc. 92-20.

Typically, this is accomplished by filing Form 3115, Application for Change in Accounting Method. However, in some situations, it is possible to change a method of accounting by filing amended tax returns for prior years.

One specific situation in which this can be done is when the taxpayer has adopted an impermissible method of accounting on its originally filed initial return. Prior to the filing of the second return, the taxpayer may file an amended return f or its initial year adopting a permissible accounting method.

The Service supports this theory. In Rev. Rul. 90-38, it stated that an improper method of accounting was considered to be adopted--and therefore could be changed only prospectively with IRS consent--if that method had been treated as such on two consecutive tax returns:

The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns represents consistent treatment of that item . . . the consistent, but erroneous, treatment of material items constitutes a method of accounting.

Similarly, in Rev. Rul. 72-491, the Service allowed a taxpayer who had used an improper method of depreciation on the first income tax return to change and correct the method of accounting by filing an amended return, as long as the return for the second year had not been filed.

Rev. Rul. 90-38 is based to a large extent on Diebold, Inc., Fed. Cir., 1990, aff'g Fed. Cl. Ct., 1989. It is clear from Diebold, particularly the Claims Court...