Changing corporations' accounting methods.

• Author: Ellentuck, Albert B.

A CORPORATION THAT HAS ADOPTED AN accounting method cannot change that method simply by amending prior-year income tax returns; IRS permission is required to change methods (Sec. 446(e)). Corporations must request a change even if they are changing from an improper method. Usually, corporations can obtain permission to change accounting methods if there are valid business reasons for making the change. However, the IRS will not grant the change if the proposed method does not clearly reflect income. In addition, permission will not be granted unless the corporation agrees to the prescribed terms and conditions set forth by the IRS for making the change (Regs. Sec. 1.446-1(e)(3)(i)).

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The IRS or the taxpayer can initiate a change in accounting method. Taxpayers that file a request for change before being contacted for an IRS examination generally receive more favorable terms and conditions (e.g., a later year of change and a longer Sec. 481(a) adjustment period for positive adjustments). A change initiated by the IRS during examination generally receives less favorable terms and conditions and may also be subject to penalties.

Observation: A change in accounting method should not be confused with the correction of an error, which is handled on an amended return. For this purpose, errors include mathematical or posting errors, or errors in the computation of tax (e.g., errors in computing a foreign tax credit, net operating loss, percentage depletion, or investment credit) (Regs. Sec. 1.446-1(e)(2)(ii)(b)).

Changes in accounting method can be categorized into automatic changes and nonautomatic changes. The procedures for making changes differ depending on which category the change falls into. Automatic accounting method changes receive more favorable treatment: There is no user fee payable to the IRS, and the Form 3115, Application for Change in Accounting Method, can be filed at any time during the year and up to the filing date, including extensions, of the tax return for the year of change. Nonautomatic accounting method changes require payment of a user fee and filing the Form 3115 by the last day of the tax year of change.

Changes That Receive Automatic Consent

Rev. Proc. 2008-52, as amplified, clarified, and modified by Rev. Proc. 2009-39 and Rev. Proc. 2010-44, provides the procedures for obtaining automatic IRS consent for accounting method changes. Although Rev. Proc. 2008-52 provides uniform procedures for many...