On Nov. 8, the IRS released Revenue Procedure 2019-43, which is the annual update to the list of accounting method changes for which the automatic consent procedures apply. This update is notable because it follows publication of regulations implementing significant changes to methods of accounting enacted by the Tax Cuts and Jobs Act of 2017 (TCJA). Revenue Procedure 2019-43 generally applies for any Form 3115, “Application of Change in Accounting Method,” filed on or after Nov. 8, 2019, for a year of change ending on or after March 31, 2019.
Generally, automatic method changes can be filed by the due date of the income tax return of the year of the change and are filed without a user fee. Nonautomatic (advance consent) method changes must be filed before the last day of the tax year, require IRS review and approval, and have a user fee for filing.
The new revenue procedure makes the following significant modifications to the list of automatic accounting method changes:
- Method changes for sale, lease, and related financing transactions are simplified.
- Previously, taxpayers requesting an automatic method change were able to use the “cut-off” method only for taking adjustments into account and were not eligible for audit protection.
- Taxpayers now can use automatic method change procedures to obtain audit protection and receive a Section 481(a) adjustment for the change.
- Taxpayers no longer are required to include with the Form 3115 a signed representation from all of the counterparties to the relevant transactions. Now, just the names of the counterparties are required to be disclosed on the Form 3115.
- Method changes for the treatment of property subject to tenant construction allowances receive similar procedural relief as noted for sale, lease, or related financing transactions.
- Due to the removal of Treasury Regulation Section 1.451-5, method changes using the definition and treatment of advance payments under that regulation were removed.
- Method changes to comply with new Proposed Treasury Regulation Section 1.451-8 for advance payments are simplified for taxpayers without an applicable financial statement (AFS).
- Streamlined procedures not requiring a Form 3115 filing now are available when the Section 481(a) adjustment would be zero. Previously, taxpayers without an AFS would qualify for this treatment only if they met a $25 million gross receipts test.
- Automatic method changes now are available when the taxpayer seeks to defer income based on amounts earned on a straight-line ratable basis over the term of an advance payment agreement.
The revenue procedure includes transition rules for taxpayers that, before release of the updated notice, filed an advance consent Form 3115 for an accounting method change and now are eligible to use the automatic change procedures. These taxpayers can refile the Form 3115 as an automatic change without the user fee. To use the transition rules, a taxpayer must notify the designated IRS national office contact person before the later of Dec. 9, 2019, or the issuance of a letter ruling granting or denying consent for the change. If the Form 3115 is converted to an automatic method change, the IRS national office will refund the advance consent filing fee.
The TCJA made several significant changes to accounting methods, including changes to the rules regarding revenue recognition. Understanding and complying with these changes has been challenging. The simplified and expanded use of automatic accounting methods provided by the updated automatic accounting method revenue procedure is welcome relief. Taxpayers should consult their tax advisers to determine if automatic method changes covered by the new revenue procedure are beneficial or whether the transition relief applies to advance consent Form 3115s currently pending at the IRS.