Letter rulings may indicate favorable change in IRS position on advance payments.

• Author: Howe, Vicki
• Position: Brief Article

In recent months, the IRS has attempted to impose more requirements on businesses wishing to change their accounting method to start deferring income related to advance payments for services under Rev. Proc. 71-21. The result of these additional requirements has been that fewer businesses have been allowed to make accounting method changes.

Rev. Proc. 71-21 allows deferral of advance payments for services if the services are provided no later than the end of the tax year following the year of receipt of payment, and the income is deferred for financial statement purposes. Specifically, the IRS National Office has been taking the position that renewable contracts do not meet the requirement that the services must be contractually required to be provided by the closc of the next tax year. The Service also has been taking the position that if the services can be performed by third partics, the advance payments do not qualify for deferral under Rev. Proc. 71-21.

Recently released Letter Rulings 9348035 and 9348044 may indicate that the IRS has relaxed its position, at least with respect to the renewability of contracts. As noted, the IRS National Office's previous position was that if a contract was renewable, it did not satisfy Rev. Proc.71-21's requirement that the services must be provided by the end of the tax year following the year of receipt. This position was...