The IRS will grant automatic consent to accounting method changes to comply with new Internal Revenue Code (IRC) Section 451(b), as added by the Tax Cuts and Jobs Act. In addition, some taxpayers may make the accounting method change on their tax returns without filing a Form 3115, Application for Change in Accounting Method. These procedures generally apply to tax years beginning after December 31, 2017. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.
All Events Test
Under IRC Section 451(b), the date that an accrual basis taxpayer takes an item into account as revenue in its applicable financial statement (AFS) is also the deadline for treating the item as satisfying the all events test. This rule also applies to any portion of an item, any other financial statement identified by the IRS, and income from a debt instrument with original issue discount (OID).
The automatic consent procedures apply to a taxpayer with an AFS who:
- wants to change to a method of accounting that complies with IRC Section 451(b); and/or
- for the year of the change, is not adopting Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) financial accounting standards for revenue recognition, titled “Revenue from Contracts with Customers (Topic 606)” that were announced on May 28, 2014.
For income from a debt instrument having OID, the IRC Section 481(a) adjustment period for the change is six tax years (year of change plus the next five tax years). However, this applies only for the taxpayer’s first tax year beginning after December 31, 2018.
The automatic consent procedures do not apply to a taxpayer that wants to make a change to a method that adopts the FASB/IASB standard, or to a special accounting method as described in IRC Section 451(b)(2).
For the first tax year beginning after December 31, 2017, a qualified taxpayer can select an accounting method that complies with IRC Section 451(b) without filing a Form 3115. An eligible taxpayer must either:
- meet the IRC Section 448(c) gross receipts test for a small business taxpayers (i.e., taxpayer’s average annual gross receipts for the three prior tax years cannot exceed $25 million); or
- be making the change to comply with IRC Section 451(b)(1)(A) and/or (b)(4), and the IRC Section 481(a) adjustment for each of the changes is zero.
These streamlined procedures do not apply to a taxpayer that wants to make a change to a method that adopts the FASB/IASB standard, or to a special accounting method as described in IRC Section 451(b)(2), or certain other concurrent accounting method changes. Additionally, tax shelters are not eligible.
The IRS warns that consent granted under the streamlined procedures is not a determination that the new accounting method is permissible, and that taxpayers using the streamlined change method do not receive audit protection.
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