TEI's comments on notice 2007-88, consent to changes in accounting method.

• Position: Tax Executives Institute

On February 5, 2007, TEI President Robert J. McDonough submitted the following letter to IRS Chief Counsel Donald L. Korb on Notice 2007-88, relating to possible revisions to the process for obtaining consent of the IRS Commissioner for changes in accounting method. The comments were prepared by TEI's Federal Tax Committee, whose chair is Carita Twinem of Briggs & Stratton Corporation. Contributing to the development of TEI's comments were Rick T. Eckert and Richard J. Zablocki of General Motors Corporation, Julianne Maggio of GE Capital Corporation, and Louis G. Farr of Nortel Networks.

Background on Tax Executives Institute

Tax Executives Institute is the preeminent international association of business tax executives with 7,000 members representing 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the 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 a balanced and practical perspective to the issues raised in Notice 2007-88.

Current Process for Accounting Method Changes

Section 446(e) of the Internal Revenue Code requires taxpayers to obtain the consent of the Commissioner before changing a method of accounting. The consent requirement promotes consistent accounting practices and eases the burden on the Commissioner to detect accounting method changes. To request consent, a taxpayer files a Form 3115, Application for Change in Accounting Method, that describes the current and new method of accounting, identifies the items or transactions that will be treated differently under the new method of accounting, and computes an adjustment for the amount by which the change from the old to the new method of accounting will produce a change in the total taxable income of the taxpayer (hereinafter "the section 481(a) adjustment"). The section 481(a) compensating adjustment is necessary to prevent the omission or duplication of items of income or deduction from the determination of a taxpayer's taxable income that might result from the use of inconsistent accounting methods in different tax periods.

Under current procedures and depending on the nature of the accounting method to be changed, the Commissioner will grant consent on either an "automatic" or "nonautomatic" basis. The automatic consent procedures apply to changes in methods of accounting specifically prescribed in guidance issued by the Commissioner, principally in Rev. Proc. 2002-9. To request a method change eligible for automatic consent, a taxpayer attaches the Form 3115, including the calculation of the section 481(a) adjustment, to its timely filed income tax return for the "year of change" and sends a copy to the IRS national office. As long as the taxpayer complies with the rules set forth in Rev. Proc. 2002-9, it is deemed to have received the Commissioner's consent, subject to examination. On examination, the IRS may review and confirm that (1) the taxpayer is eligible for the automatic consent procedure, (2) the method is a permitted method, (3) the method is implemented correctly and applied to the proper items or transactions, and (4) the taxpayer computed the section 481(a) adjustment amount correctly.

The nonautomatic consent method is governed by Rev. Proc. 97-27. Together with a user fee, the taxpayer submits Form 3115 to the IRS national office during the year in which the proposed change is requested to be effective. The national office reviews the application and considers, among other issues, whether the requested method is permitted, clearly reflects income, and whether the section 481(a) adjustment is properly computed. The nonautomatic consent process frequently requires a taxpayer to submit supplemental information and documentation explaining the application of the method to the taxpayer's items or transactions and may involve one or more meetings or teleconferences with IRS representatives. As with the automatic consent process, upon approval of a change, the application of the change in method to specific items or transactions is subject to confirmation on examination. The permissibility of the method, though, is generally not subject to challenge.

Notice 2007-88

In Notice 2007-88, the IRS describes a proposal to streamline the process for securing the Commissioner's consent for changes to a taxpayer's accounting methods while preserving the ability of the IRS to effectively monitor those changes. The current process would be replaced by a three-tier system.

In the "standard" consent process, a taxpayer that timely files a properly completed Form 3115 would be granted consent for its requested change, subject to confirmation on examination that (1) the accounting method is a permitted method and is properly implemented and applied to the taxpayer's items and (2) the amount of the section 481(a) adjustment is properly computed. The IRS anticipates that the vast majority of accounting method change requests would be made through the standard consent process because, in addition to incorporating the automatic consent procedure of Rev. Proc. 2002-9 (or its successor guidance), taxpayers would submit all other requests except those requiring "specific" consent or for which a letter ruling is sought.

The second, or "specific consent," process would be reserved for accounting method changes (1) specifically identified in published guidance as requiring specific consent of the IRS or (2) for which taxpayers seek terms or conditions different from, or a waiver of scope limitations that apply to, applications for change under the standard consent procedure. The specific consent procedures process would be similar to those employed for obtaining consent under the current nonautomatic method, except that the time for filing the application would be accelerated to the last day of the ninth month of the requested "year of change" (hereinafter the "ninth-month rule"). If consent is given, the method would be accorded "audit" and, in most cases, "ruling" protection; hence, the year of change and the permissibility of the method would...