Generally, every year the IRS releases a revenue procedure containing an updated List of Automatic Changes. This guidance lists when taxpayers can use the automatic consent procedures to file a Form 3115 (Application for Change in Accounting Method). The automatic consent procedures provide taxpayers the following benefits:
- An extended time frame for filing Form 3115,
- The ability to immediate use the new method change (as opposed to waiting for an IRS consent), and
- Avoidance of the user fee associated with non-automatic method change requests (usually $9,500 for a single applicant).
The IRS recently released the 2018 iteration of the List of Automatic Changes. This guidance, Rev. Proc. 2018-31, supersedes Rev. Proc. 2017-30.
Highlights of the new guidance:
- The IRS removed several obsolete provisions, primarily those granting temporary waivers of certain eligibility rules for tax years ending before Dec. 31, 2016.
Also of note is the IRS’s choice not to extend the eligibility waiver provision within Section 11.08, Tangible Property allowing taxpayers to file under the automatic procedures despite having made a similar change in the past five years. This eligibility waiver expired for tax years beginning on or after Jan. 1, 2017.
- Tax reform brought about several new or modified small taxpayer exceptions for various accounting method rules. The IRS intends to issue separate guidance concerning method changes related to these new small taxpayer exceptions. In anticipation of that future guidance, the Service added new restrictions to several existing automatic changes that prohibit their use by small taxpayers. In so doing, the IRS is requiring small taxpayers to wait on this future guidance rather than use the existing automatic changes related to the cash method, inventories, and UNICAP.
Transition rules related to the above can be found in the revenue procedure’s Effective Date section under paragraph .02(2).
- Concerning automatic changes related to advance payments, the IRS added a new provision allowing taxpayers to file under the automatic procedures regardless of whether the taxpayer made a similar change in the past five years. This waiver applies only to a taxpayer’s first or second tax year ending on or after May 9, 2018. This update relates to Notice 2018-35, discussed in a previous tax alert found here: IRS releases transitional guidance on advance payments.
Taxpayers should also note that because of the recent changes to Section 451, the automatic change related to Treas. Reg. 1.451-5, Advanced Payments for Goods and Long-Term Contracts is now only applicable for tax years beginning on or before Dec. 31, 2017.
- A new reserved Section 19 was added with the title “Special Rules for Long-Term Contracts (§460).” While it is unclear what changes might later fall under this newly reserved section, the most likely candidates are changes related to the new small taxpayer exception for the Percentage of Completion method or some possible version of the return of past automatic § 460 changes previously removed from the list.
The effective date of the Rev. Proc. 2018-31 is May 9, 2018. After that date, taxpayers must file all accounting method changes under, and in compliance with, this new guidance. For assistance with this new guidance or other accounting method issues, contact your tax advisor.