Change of accounting method for treatment of a single item.

• Author: Marchbein, Joe

Some practitioners believe an accounting method change involves a change in overall methods. This is not quite right, since the regulations under Sec. 446 define a method of accounting as including the treatment of any material item. Regs. Sec. 1.446-(1)(e)(2)(ii)(a) provides that a material item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. In determining this, the key point is whether the practice permanently changes the amount of taxable income over the taxpayer's lifetime. If the practice does not permanently affect the taxpayer's lifetime taxable income, but does or could change the tax year in which taxable income is reported, it involves timing and is therefore considered a method of accounting (Rev. Proc. 91-31).

Thus, practitioners should be aware that a change in the treatment of a single item of income or expense may be subject to the provisions of Secs. 446 and 481, and Rev. Proc. 92-20. Permission must be obtained from the IRS before a change is made in the reporting of such an item. Otherwise, even an incorrect method must still be used.

Consent to change an accounting method is generally done by filing Form 3115, Application for Change in Accounting Method, with the IRS National Office and paying a $600 user fee. In order to change an accounting method for any tax year, Form 3115 must be filed within 180 days of the beginning of the fiscal year for which the change is requested. This 180-day period is not reduced if the year for which the change is requested is a short tax year. Once consent is obtained, under Sec. 481, the impact of the change must be spread over a period of tax years, up to a maximum period of six.

If a taxpayer is using an erroneous method and the Service discovers this on audit, the taxpayer generally will not be allowed to...