The new rules for accounting method changes.

• Author: Portnoy, Lawrence F.

Overview

In Rev. Proc. 92-20, 1992-12 I.R.B. 10, the Internal Revenue Service issued new rules that taxpayers must follow in making requests to change accounting methods, supplanting the guidelines set forth in Rev. Proc. 84-74, 1984-2 C.B. 736. This article highlights important differences between the two procedures, including the expansion of the definition of a Category A method; the imposition of more stringent requirements with respect to certain Category A methods; the establishment of a new 90-day window for making method changes for taxpayers under examination; the development of specific rules for LIFO changes; and the elimination of the NOL/credit offset rule and the "67-percent rule" for Category B changes.

Under the new revenue procedure, special transition rules apply if the taxpayer is both (1) under IRS examination on March 23, 1992, and (2) not within either the 120-day or 30-day window period of Rev. Proc. 84-74 on that date. These rules - which are outlined in Exhibit I - apply only during the 180-day period from March 23, 1992, through September 18, 1992. Exhibit II summarizes the year-of-change rules and section 481(a) adjustment periods for different types of accounting method changes. As with the new rules discussed in the text, Exhibit II does not reflect all details and conditions of the complex new guidelines.

Expanded Definition of Category A Methods

Rev. Proc. 92-20 uses the same basic definition of a Category A method as Rev. Proc. 84-74 - i.e., one "that is specifically not permitted to be used by the taxpayer by the Code, regulations, or by a decision of the Supreme Court of the United States.' The new procedure, however, eliminates the requirement of Rev. Proc. 84-74 that "the Service may, or at the taxpayer's request will, treat the taxpayer's method of accounting as a Category A if the taxpayer's method is clearly erroneous."

Instead, Rev. Proc. 92-20 expands the Category A definition to include an accounting method that "differs from a method the taxpayer specifically is required to use under the Code, the regulations or a decision of the Supreme Court of the United States." This new language is intended to preclude taxpayer arguments that a method that is not "specifically not permitted" - even though another method is required - is a Category B method. (A Category B method is defined as any method not falling within the definition of a Category A method. Category B methods include both permissible methods as well as certain erroneous methods; a method held to be not proper in a Tax Court decision is an example of an erroneous B method.)

"Designated A" Methods

Rev. Proc. 92-20 carves out a new subset of Category A methods - the "Designated A" method. A Category A method becomes a Designated A method only if it is designated as such in a document published in the Internal Revenue Bulletin It is contemplated that Designated A's will be method changes required by tax law changes (e.g., the repeal of section 463 concerning accrual of vacation pay) but with respect to which the taxpayer does not comply with the law in a timely manner.

The terms and...