IRS Removal of Automatic Accounting Methods Sure to Disappoint

Published: Jun 19, 2024

The IRS is increasing transfer pricing enforcement, sending letters to 180 U.S. subsidiaries of foreign companies with low margins or losses. Taxpayers should review documentation for cross-border transactions.

 

Michael Vinson, CPA – Houston 

 

The IRS' recent update in April to its automatic accounting method procedures (Rev. Proc. 2024-23) has significant implications for taxpayers.   

Now, there are two less methods that are on the automatic change list. This means that taxpayers must secure a formal letter (consent) from the IRS approving the change. The modification is likely to be met with dissatisfaction as automatic procedures—which do not require a user fee and have a more flexible filing timeline—are generally preferred by taxpayers. 

This revision impacts the application of Rev. Proc. 2015-13 by eliminating two frequent accounting method changes from the automatic list: (1) specific cost capitalization methods for inventory or self-constructed property, and (2) certain adjustments to the appropriate timing of revenue recognition. 

Taxpayers intending to implement either of these accounting method changes should reassess their implementation schedule. The Form 3115 for automatic accounting method changes can be filed any time before the tax return for the year of change is due. However, for non-automatic method changes, companies must file the Form 3115 by the last day of the desired tax year of change and pay a user fee. 

If a taxpayer submits a non-automatic Form 3115 requesting a change to an evidently permissible accounting method, the IRS is expected to consent, but this is not guaranteed. According to Rev. Proc. 2015-13, the IRS National Office can refuse a request to change a method if it deems that the requested method does not accurately represent the taxpayer's income or would not be conducive to efficient tax administration. 

Consequently, taxpayers should be aware of the changes and the implications that come from these items no longer being considered an automatic accounting method change. 

 

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