IRS-initiated accounting method changes.

• Author: Gentle, Richard A.

The Service recently released Notice 98-31, providing a proposed revenue procedure outlining procedures under Sec. 446(b) for IRS-initiated accounting method changes. While Rev. Proc. 97-27 indicates that accounting method changes made by the Service generally receive less favorable terms than voluntary changes, the IRS has heretofore provided little guidance on nonvoluntary accounting method changes.

Notice 98-31 provides procedures for accounting method changes that the Service initiates and procedures that it uses for accounting method issues it raises and resolves on a non-accounting method change basis. While the proposed revenue procedure sets forth procedures for "timing issues" before Examination, Appeals and Federal courts, it does not alter the authority of Appeals or government counsel to settle cases based on litigation hazards.

Examinations

Notice 98-31 states that an examining agent proposing an adjustment with respect to a timing issue will treat the issue as an accounting method change. The term "timing issue" means any issue about the propriety of a taxpayer's accounting method treatment for an income or expense item. The change in the treatment of such timing issue will generally require a Sec. 481(a) adjustment. Only in rare and unusual circumstances will an agent make a change using the cut-off method (e.g., the taxpayer's books and records do not contain sufficient information to compute the Sec. 481(a) adjustment). The agent is instructed to make the change in the earliest tax year under examination, with a one-year Sec. 481(a) adjustment period (in the year of change).

The notice also indicates that, to be consistent with the policy of encouraging voluntary compliance with proper tax accounting principles, the agent will not initiate an accounting method change if the change places the taxpayer in a more favorable position.

Appeals and Counsel for the Government

Accounting Method Change. An Appeals officer or government counsel has flexibility in resolving a timing issue. The notice details this flexibility, but notes that it does not alter the authority of Appeals or counsel to resolve or settle any issues. An Appeals officer or government counsel may resolve a timing issue by changing the taxpayer's accounting method using compromise terms and conditions. Possible terms and conditions are:

* Year of change (agreeing to a later year of change);

* Amount of the Sec. 481(a) adjustment (agreeing to a reduced...