IRS eases rules for accounting-method changes.

• Author: Gibbs, Paul K.

The IRS released Rev. Proc. 2002-19, which makes two significant modifications to Rev. Procs. 2002-9 and 97-27. Taxpayers receive much more favorable terms and conditions for changing an accounting method, and the rules governing taxpayers under examination, before an Appeals office or a Federal court are liberalized. Taxpayers may now deduct the entire amount of negative Sec. 481(a) adjustments (i.e., favorable adjustments that reduce taxable income) in one tax year, while previously they generally had to spread all their Sec. 481(a) adjustments over four tax years.

The IRS still permits taxpayers to spread positive Sec. 481(a) adjustments (i.e., unfavorable adjustments that increase taxable income) ratably over four tax years. Also, taxpayers currently under examination, before an Appeals office or a Federal court, that have an "issue pending" can now make accounting-method changes, but only on a prospective basis and without any audit protection. Pursuant to Rev. Proc. 2002-19, an issue is pending if the IRS has given the taxpayer written notification that an adjustment is being made or that an adjustment will be processed, even though the IRS has not yet determined the amount of the adjustment.

Effective Date

Rev. Proc. 2002-19 generally is effective for tax years ending on or after Dec. 31, 2001. However, for changes involving the elimination of the scope restrictions for pending issues, the revenue procedure is effective for tax years ending on or after March 14, 2002, if the change is made under Rev. Proc. 97-27's nonautomatic procedures.

To the credit of the IRS National Office, the IRS is expected to publish a notice clarifying that a taxpayer that has a Form 3115, Application for Change in Accounting Method, for a favorable method change pending on March 14, 2002, which was filed under Rev. Proc. 97-27 (but not under Rev. Proc. 99-49) for a tax year that ended prior to Dec. 31, 2001, will be permitted to "roll" the year of change forward so it may benefit from the one-year spread of the Sec. 481(a) adjustment provided in Rev. Proc. 2002-19. To obtain this treatment, it is expected that a taxpayer would merely need to notify the IRS individual processing the taxpayer's Form 3115 that it wants to roll forward the year of change.

In addition, it is expected that the IRS notice will permit a taxpayer that filed a Form 3115 for a favorable method change under Rev. Proc. 97-27 (but not under Rev. Proc. 99-49) for a tax year that ended on or after Dec. 31, 2001, to take the entire amount of the negative Sec. 481(a) adjustment in one year, even if the IRS consent letter has already been issued to the taxpayer. It is expected that despite the four-year-spread period provided for in the ruling granting the method change, the taxpayer would simply take the entire amount of the Sec...