Significant new guidance for changing an accounting method.

• Author: Smalley, Michael T.

The IRS recently issued three new revenue procedures on accounting-method changes. Two of these procedures address taxpayer-initiated method changes (voluntary changes): Rev. Proc. 2002-9 provides the exclusive procedures by which taxpayers may obtain the automatic consent of the IRS to change certain methods of accounting; Rev. Proc. 2002-19 modifies the adjustment spread period required when a taxpayer makes a method change under either Rev. Proc. 2002-9 or 97-27 (dealing with changes not qualifying for automatic consent). Both Rev. Proc. 2002-9 and 2002-19 are effective for tax years ending after Dec. 30, 2001. The third new procedure, Rev. Proc. 2002-18, addresses method changes imposed on taxpayers by the IRS as a result of an examination (involuntary changes) and is generally effective for examiner reports issued after June 30, 2002.

The publication of this new guidance is significant and, with respect to the voluntary change procedures, presents planning opportunities for taxpayers. It also presents an opportune time to review the types of accounting practices that constitute a method of accounting for tax purposes, the general procedures by which a taxpayer may initiate a change in accounting method, certain benefits or consequences of initiating or not initiating a change, and a brief discussion of the new voluntary-method-change guidance.

Accounting-Method Changes

A method of accounting includes a taxpayer's overall plan of accounting (e.g., cash versus accrual) and the accounting treatment of any item of income or deduction. In general, an accounting method affects the timing for reporting income or deductions. If an accounting practice does not permanently change the amount of the taxpayer's lifetime income, but does or could change the tax year in which income is reported, it involves timing. An accounting method that is used for two or more tax years is generally considered "adopted" and may only be changed with the consent of the IRS, even if the method was erroneous.

An accounting-method change occurs when the taxpayer computes its taxable income for a particular year using an accounting method that is different from the method it used for the preceding tax year. The taxpayer makes voluntary method changes on a prospective basis. On the other hand, an involuntary change imposed by the IRS during the course of an examination is made in the earliest tax year under examination or, if later, the first tax year in which the IRS...