Publication 538 |
2000 Tax Year |
Change in Accounting Method
You can generally choose any permitted accounting method when you
file your first tax return. You do not need IRS approval to choose the
method. It must be used consistently from year to year and clearly
show your income. See Accounting Methods, earlier.
A change in your accounting method includes a change not only in
your overall system of accounting but also in the treatment of any
material item. Although an accounting method can exist without
treating an item the same all the time, an accounting method is not
established for an item, in most cases, unless the item is treated the
same every time.
IRS Approval
After you file your first return, you must get IRS approval to
change your accounting method. If your current method clearly shows
your income, the IRS will consider the need for consistency when
evaluating the reason for changing your accounting method.
If you do not request IRS approval to change an accounting method,
the absence of IRS approval will not:
- Prevent the IRS from imposing any penalty or additional
tax.
- Reduce the penalty or the additional tax.
Approval required.
The following changes require IRS approval.
- A change from the cash method to an accrual method or vice
versa (unless you are making an automatic change to an accrual
method).
- A change in the method or basis used to value
inventory.
- A change in the method of figuring depreciation (except
certain permitted changes to the straight-line method for property
placed in service before 1981, as explained in Publication 534).
Approval not required.
The following are not changes in accounting methods and do not
require IRS approval.
- Correction of a math or posting error.
- Correction of an error in computing tax liability (such as
an error in computing a credit).
- An adjustment of any item of income or deduction that does
not involve the proper time for including it in income or deducting
it.
- An adjustment in the useful life of a depreciable asset. You
cannot change the recovery period for ACRS or MACRS property
(depreciable property placed in service after 1980).
Filing Form 3115
In general, you must file a current Form 3115 to request a change
in either an overall accounting method or the accounting treatment of
any item. Attach any required user fee. No user fee is required for an
automatic change (discussed later).
Generally, you must file Form 3115 during the tax year for which
the change is requested. You should file as early in the year as
possible to give the IRS enough time to respond to the form before the
original due date of the return for the year of change.
The IRS normally acknowledges receipt of a completed Form 3115
within 30 days after the applicant's filing date. See the form
instructions if you do not receive an acknowledgment. The IRS does not
acknowledge receipt of Form 3115 for automatic change procedures.
Conference.
If you think the IRS may give an unfavorable response to your
request to change your accounting method, you can request a conference
when you file Form 3115. The national office will arrange one before
the IRS formally replies to your Form 3115. If you do not specifically
request a conference, the IRS presumes you do not want one.
Extension of time to file.
If you do not file a Form 3115 during the year of change, you will
be granted an extension to file the form only in unusual and
compelling circumstances. See section 301.9100-3(c)(2) of the
regulations.
More than one business.
You can use different methods of accounting for separate and
distinct businesses. However, if you request a change in accounting
method for one of the businesses, the IRS will consider whether the
change creates or shifts profits or losses between the businesses and
whether the proposed method clearly reflects your income. You must
identify each business by name, employer identification number, and
method of accounting.
Incomplete Form 3115.
If your application is not properly completed according to the
instructions for a current Form 3115, you will be notified and given
21 days from the date of the notification letter to furnish the
necessary information. If you do not submit the required information
within the reply period, the IRS will not process your Form 3115.
However, the IRS can grant up to an additional 15 days to furnish the
information. Your written request for the 15-day extension must be
submitted within the 21-day period.
Taxpayers under examination.
If the IRS has contacted you to schedule an examination of any of
your returns, you can request approval to change your accounting
method under section 6 of Revenue Procedure 97-27 (or any
successor) if that method of accounting is not an issue under
consideration. You can request to make the change:
- During the first 90 days of any tax year if you have been
under examination for at least 12 months.
- During the 120-day period following the date an examination
ends, regardless of whether a subsequent examination has
commenced.
- With the permission of the district director.
Automatic Change Procedures
These are procedures under which certain taxpayers can presume to
have IRS approval to change their method of accounting. The approval
is granted for the tax year for which the taxpayer requests a change
(year of change), provided the taxpayer complies with the provisions
of the applicable revenue procedure. No user fee is required for an
application filed under an automatic change procedure. Generally, you
must use Form 3115 to request an automatic change. See the form
instructions and Revenue Procedure 98-60, 1998-51 I.R.B.
16 (or any successor), for more information.
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