In a Chief Counsel Advice memorandum (CCA 201852019
), the IRS clarified the broad applicability of its previously issued automatic change procedures to accrual-method taxpayers with applicable financial statements (AFS) that are required to make changes to comply with Section 451(b), as revised by the Tax Cuts and Jobs Act (TCJA). The memorandum states that taxpayers that currently recognize an item of income on an impermissible method under Section 451(b)(1)(C), i.e., the all-events test, can use the procedures of Rev. Proc. 2018-60 (see Tax Flash 2018-23
for more details) to obtain automatic consent to correct the impermissible method.
There was some uncertainty on whether the IRS had intended the automatic procedures to broadly apply to taxpayers, specifically for those identified as following one of two sets of circumstances. The first includes any taxpayer that was not on a permissible method under the law prior to the TCJA. The second includes any taxpayer on an impermissible method and for which the appropriate tax method would generally recognize income prior to recognition in its AFS (e.g., the taxpayer is not accelerating income because of AFS, pursuant to Section 451(b)(1)(A)). Based on the memorandum, both of those situations appear to be covered by the automatic change procedures.
Rev. Proc. 2018-60 provided automatic change procedures for taxpayers that need to comply with Section 451(b)(1)(A), as amended by the TCJA. The latter generally requires taxpayers to accelerate income to the extent it is included in AFS earlier than the all-events test. The IRS position clarifies that the rules set forth in that section include the all-events test set forth in Section 451(b)(1)(C). Therefore, to comply with Section 451(b)(1)(A), a taxpayer must also comply with Section 451(b)(1)(C). Thus, a taxpayer may use these automatic change procedures to comply with the all-events test with or without acceleration due to AFS recognition.
This is welcome news for taxpayers that are presently on impermissible methods for revenue recognition and need to change to comply with Section 451. All taxpayers need to assess tax methods for each revenue stream to determine if changes are required. Certain special methods of accounting, e.g., percentage of completion under Section 460, are not eligible for an automatic change and are required to be filed under the non-automatic procedures. With so many different procedures applicable for changes in revenue recognition -- knowing which procedure to file under, knowing whether it is automatic, determining whether a Form 3115 is required, choosing which ordering rules apply, deciding between cut-off vs. Section 481(a) implementation, and ascertaining whether audit protection applies to a change -- selecting the most appropriate method can be a complex undertaking.
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Washington National Tax Office
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Washington National Tax Office
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