Accounting method change procedures: one possible solution.

• Author: Shevak, Richard

The current nonautomatic procedures for obtaining the Service's consent to change an accounting method for federal income tax purposes require a taxpayer to file a Form 3115, Application for Change in Accounting Method, during the tax year of change (see Regs. Sec. 1.446-1(e)(3)(i); Rev. Proc. 97-27, Section 5.01(a)). While there is no official guidance binding the IRS to review a Form 3115 within a particular time period, taxpayers generally expect the Service to review and respond to Forms 3115 before the extended due date for filing the taxpayer's income tax return. Unfortunately, given the backlog of method change requests, the IRS is not always able to respond to a taxpayer's requests by that date.

A taxpayer that has not received a response to its Form 3115 by the extended due date has to make a choice: (1) use the proposed accounting method on the return for the year of change before receiving consent and amend the return in the event consent is not granted; or (2) wait for consent agreement and file an amended return when consent is received.

Rev. Proc. 2007-1 mostly addresses this situation. Section 9.17 of Rev. Proc. 2007-1 states that a taxpayer must receive consent before implementing a change in accounting method. However, the revenue procedure goes on to state:

[a] taxpayer that timely files an advance consent accounting method change request and takes the change into account in its federal income tax return for the year of change (and any subsequent tax year) prior to receiving the letter ruling granting permission for the requested change, may nevertheless rely on the letter ruling received from the Associate office after it is received, as provided in ... this revenue procedure. If, however, the requested change is modified or is withdrawn, denied, or similarly closed without the Associate office having granted consent, taxpayers are not relieved of any interest, penalties, or other adjustments resulting from the improper implementation of the change. [Emphasis added.]

On the other hand, if permission is granted, and if the taxpayer filed its return before receiving consent, the revenue procedure states that "the photocopy of the signed Consent Agreement copy of the letter ruling should be attached to the amended return for the year of change that the taxpayer files to implement the change in accounting method." Unfortunately, instead of creating a system that requires the IRS to provide timely feedback, the revenue...