Accounting Method Changes for Accrual Method Taxpayer's Income
In Revenue Procedure 2021-34, IRS has provided procedures for taxpayers to obtain automatic consent to change methods of accounting to comply with final regs regarding Code Sec. 451's rules on the tax year of inclusion of certain income by accrual method taxpayers, that were amended to reflect changes made by the Tax Cuts and Jobs Act (TCJA). Revenue Procedure 2021-34 also provides procedures for a taxpayer to obtain IRS's consent to change its method of accounting to comply with those regs, by providing rules related to cost offset method changes.
To reflect the TCJA changes, IRS, in TD 9941, amended Reg § 1.451-3 (rules relating to the tax year of inclusion in gross income under Code Sec. 451(b)), Reg § 1.451-8 (rules relating to the use of the deferral method for advance payments under Code Sec. 451(c)) and Reg § 1.1275-2(l) (rules clarifying that an item of income that is subject to the timing rules in proposed Reg § 1.451-3, such as specified credit card fees, is not taken into account in determining the amount of OID on a debt instrument.)
The new Revenue Procedure modifies Rev Proc 2019-43 to provide procedures for a taxpayer to obtain automatic IRS consent to change its methods of accounting to comply with Reg § 1.451-3, Reg § 1.451-8, and/or Reg § 1.1275-2(l), as applicable, including special terms and conditions for certain changes to comply with Reg § 1.451-3, Reg § 1.451-8, and/or Reg § 1.1275-2(l), as applicable. The new Revenue Procedure also make changes to the current automatic changes in Rev Proc 2019-43, including:
- Modifying sections of Rev Proc 2019-43 on uniform capitalization methods (Secs. 12.01 and 12.02) and inventory (Secs. 22.05, 22.11, and 22.18) to temporarily waive the eligibility rule in section 5.01(f) of Rev Proc 2015-13 for certain inventory changes made in connection with changes to comply with Reg § 1.451-3 and Reg § 1.451-8.
- Modifying the change in overall method of accounting from the cash method to an accrual method (in section 15.01) for taxpayers with an AFS;
- Removing the automatic change for credit card late fees in section 16.06;
- Modifying the automatic change for advance payments under section 16.07 by making the change inapplicable for a year of change beginning on or after January 1, 2021; and
- Removing the automatic change for credit card cash advance fees in section 16.08.
The new Revenue Procedure modifies Rev Proc 2015-13 to provide procedures for a taxpayer to obtain IRS consent to change its method of accounting to comply with Reg § 1.451-3 and/or Reg § 1.451-8, as applicable, by:
- Adding a new automatic change eligibility rule under section 5.01(1)(g) that requires certain taxpayers making a cost-offset-related inventory method change, as defined in new section 5.06, to also make the corresponding cost offset change for the same year of change; and
- Adding concurrent automatic method change language in section 6.03(1)(b) to provide for certain taxpayers to make one or more cost-offset-related inventory method changes and one or more corresponding cost offset changes on the same Form 3115, Application for Change in Accounting Method.
Except as provided below, the new Revenue Procedure is effective for Forms 3115 filed on or after August 12, 2021.
The National Office will return any Form 3115 requesting a change in method of accounting that was filed with the National Office on or before August 12, 2021, under the non-automatic procedures of Rev Proc 2015-13 for a tax year beginning after December 31, 2017, that is pending with the National Office on August 12, 2021, and that is eligible for the automatic change procedures as described the new Revenue Procedure. The National Office will send a letter to notify the taxpayer of the return of the Form 3115 and will return the user fee submitted with the Form 3115.
A taxpayer that resubmits the Form 3115 under the automatic change procedures for a change in method of accounting described in the Revenue Procedure must resubmit the Form 3115 that conforms to the automatic change procedures by the earlier of
- The 60th calendar day after the date of the National Office’s letter acknowledging the return of the Form 3115, or
- The date the taxpayer is required to file the duplicate copy of the Form 3115 under section 6.03(1)(a)(i)(B) of Rev Proc 2015-13.