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Washington Tax Alert - September 17, 2009 - Automatic Accounting Method Changes

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com

September 17, 2009

On August 27, 2009, the National Office issued Rev. Proc. 2009-39 modifying Rev. Proc. 2008-52, which sets forth the procedural rules for obtaining automatic consent for certain changes in methods of accounting. Shortly before Rev. Proc. 2009-39 was issued, personnel from the Office of Chief Counsel participated in a panel discussion regarding automatic accounting method changes.

The comments of Chief Counsel personnel during the panel discussion indicate that ambiguities still exist in the automatic consent procedures (even though the two revenue procedures consist of 347 pages), and automatic accounting method changes may be scrutinized on examination to determine if the taxpayer has satisfied the terms and conditions of the revenue procedures. In particular, three specific accounting method changes are prime targets for examination. Taxpayers making these changes must file three copies of the Form 3115, including sending one copy to a special IRS office in Ogden, Utah.

In the panel discussion, IRS personnel clarified some points that are favorable to taxpayers:

  • With regard to changes in depreciation methods, taxpayers can combine changes that result in negative IRC § 481 adjustments on one Form 3115, and depreciation changes that result in positive IRC § 481 adjustments on a second Form 3115.
  • Self-insured medical expenses can be accrued in the year medical services are provided to the taxpayer's employees if the claims are submitted by the medical service provider. In addition, the amount accruable is not limited to claims submitted within 2-1/2 months of year end.
  • Accrual method taxpayers that use the deferral method for advance payments ( see Rev. Proc. 2004-34) are not required to file amended tax returns if they subsequently issue restated financial statements.
  • Taxpayers may now make an automatic accounting method change if they are using a permissible IRC § 263A method and want to change their method to include one or more additional costs in the computation.
  • Taxpayers may make an automatic accounting method change with regard to the valuation of subnormal or obsolete inventory.

The National Office personnel discussed one accounting method change that is not considered to be within the scope of the automatic consent revenue procedure even though it is described in the Appendix to Rev. Proc. 2008-52. The change at issue involved an accrual basis taxpayer that deferred the deduction of expenses or interest until they were paid because it incorrectly determined the items were subject to IRC § 267, and wants to change its accounting method to accrue the items. Although this method change appears to be described in both Appendix § 12.01 and Appendix § 14.09 to Rev. Proc. 2008-52, the National Office's position is that the change cannot be made automatically.