New procedures for accounting method changes.

• Author: Addison, Emerson J., Jr.

In general, a taxpayer seeking to change its method of accounting for a particular item may not do so without advance IRS approval. Earlier this year, the Service issued Rev. Proc. 92-20, which substantially modifies the procedures for requesting accounting method changes on or after Mar. 23, 1992. Under the new rules, different procedures apply depending on whether the taxpayer is changing from an improper method of accounting to an acceptable one or from one acceptable method to another acceptable method, and whether or not the taxpayer is under audit at the time of the request.

As under the previous procedures, a taxpayer must generally request a change in accounting method by filing Form 3115, Application for Change in Accounting Method, within 180 days after the beginning of the tax year in which the change will be implemented. If Form 3115 is filed after the 180th day of the tax year, the change will be effective for the following year, unless the taxpayer obtains permission to file a late application on a showing of good cause. (Note: IRS approval of late applications is generally difficult to obtain.)

The filing of Form 3115 by a taxpayer not currently under examination generally has the following benefits. * The Service may not adjust prior year returns for the particular tax issue that is the subject of the change. * Any increase or decrease in income that results from the change in the first year the new method is applied (i.e., the Sec. 481(a) adjustment) can generally be recognized ratably over a period of three to six years. * No interest or penalty is charged for failing to make the adjustment in an earlier tax year, even if an incorrect method was previously used.

Improper or "Designated A"

methods

Rev. Proc. 92-20 provides special rules for taxpayers that have been using an improper or "Category A" accounting method that is specifically identified by the IRS as a "Designated A" method. Although no "Designated A" methods have yet been identified by the IRS, these special rules are expected to apply to taxpayers who fail to adopt an accounting method that is required by a statutory change, or who continue to use a method after it has been specifically identified as improper by statute or regulation. The failure to apply required Sec. 263A inventory capitalization methods, and the failure to adopt the Sec. 460 percentage-of-completion method when required, are examples of methods that may eventually be identified as...