Rev. proc. 92-20, relating to changes in methods of accounting.

On October 21, 1992, Tax Executives Institute submitted the following comments to the Internal Revenue Service on Rev. Proc. 92-20, relating to changes in methods of accounting. The comments were prepared under the aegis of the Institute's Federal Tax Committee, whose chair is David F. Nitschke of Amerada Hess Corporation. Also contributing to the preparation of the comments were Paul Cherecwich, Jr. of Thiokol Corporation, a primary drafter of the submission, and Donald A. Alder of Dean Witter Financial Services Group, who is chair of TEI's Federal Tax Subcommittee on Tax Accounting, Methods, and Financial Reporting.

The Internal Revenue Service has released Revenue Procedure 92-20 (1992-12 I.R.B. 10), relating to changes in accounting methods, to update and supersede Revenue Procedure 84-74 (1984-2 C.B. 736). The stated purpose of the revenue procedure is to encourage prompt compliance with proper tax accounting principles and to discourage taxpayers from delaying the filing of applications for permission to change from impermissible methods. TEI believes that the new procedure improves some aspects of the process for obtaining changes in accounting methods, but believes further changes should be made. Thus, some of our comments concern procedures contained in the predecessors to Rev. Proc. 92-20.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 4,700 members are employed by more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promote the uniform and equitable enforcement of tax laws, and to reduce the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the revenue procedure for accounting method changes.

Overview

The objectives of Rev. Proc. 92-20 are to provide rules that "encourage voluntary compliance" and are relatively easy for taxpayers to follow. Through a gradation of incentives, the new rules provide strong inducements for taxpayers both voluntarily and quickly to change impermissible methods of accounting. The graded incentives assure less favorable treatment for taxpayers compelled to change accounting methods upon examination. Furthermore, the rules provide various window periods within which voluntary method changes may be secured, following contact for examination but before a compulsory change imposed by the Commissioner.

In a departure from Rev. Proc. 84-74, the IRS in the new procedure has abandoned the "clearly erroneous" standard in defining Category A methods. By eliminating the clearly erroneous standard, the IRS has removed one source of uncertainty for taxpayers. Although this particular change is welcome, TEI believes that the overall tone and emphasis of the graded incentives contained in the new procedure is weighted far too much in favor of a punitive "stick" approach, rather than a proper balance of "carrot" and "stick" incentives. Thus, the procedure provides clear guidelines for securing consent of the Commissioner where an accounting method falls within one of the enumerated categories of methods -- thereby clarifying the disposition of the various categories of voluntary accounting method changes (i.e., "year of change" and income adjustment spread period). The procedure, however, assigns precious little weight to the concept of substantial compliance.(1) The task of distinguishing among permissible and erroneous methods remains a factual undertaking, subject to misinterpretations and errors.

Indeed, noncompliance with required accounting methods is frequently a result of unintentional misinterpretation of the law (or facts) or is attributable to a lack of timely published guidance from the IRS.(2) Rev. Proc. 92-20 raises the stakes for taxpayers' misapprehending (or, indeed, not being aware of) the propriety of an accounting method and, thus, contradicts IRS's goal of increasing voluntary changes of accounting method. Taxpayers may choose, should they discover that they are using a questionable method after the various voluntary change windows close, to perpetuate use of that method rather than face the uncertain terms and conditions that may be imposed by an examining agent or appeals officer. The incentive to defer making changes for methods discovered to be erroneous may be particularly acute for coordinated examination program (CEP) taxpayers whose only hope for consideration of a method change in a non-adversarial setting is to take advantage of the 120- or 30-day windows.(2)

Specific Comments

1. Definitions. Paragraph 3.02 of Rev. Proc. 92-20 states that a taxpayer is under examination when it has been contacted "in any manner" by a representative of the IRS. Since most large taxpayers are under continuous audit as part of the CEP program (and thus are in constant contact with the examination team), they are effectively precluded from using the 90-day window of paragraphs...