January 31, 2008
Mr. George J. Blaine
Associate Chief Counsel (Income Tax and Accounting)
Internal Revenue Service
Ben Franklin Station,
P.O. Box 7604
Washington, DC 20044
Re: Comments on Notice 2007-88 – New Procedures for Filing Accounting Method
Changes
Dear Mr. Blaine:
The American Institute of Certified Public Accountants (AICPA) offers the enclosed comments
suggesting improvements for processing accounting method change (CAM) requests. These
comments were developed by the Form 3115 Task Force of the AICPA’s Tax Accounting
Technical Resource Panel and approved by the Tax Executive Committee.
Our suggestions focus on reducing the current backlog of CAM requests, primarily by replacing
the present CAM approval process with a two-track system under which the great majority of
CAM requests could be handled in a more expeditious fashion.
If you would like to discuss these proposals further, please contact me at [email protected];
or Les Schneider, Chair, AICPA Form 3115 Task Force, at [email protected]; or George
White, AICPA Technical Manager, at [email protected].
Sincerely,
Jeffrey R. Hoops
Chair, Tax Executive Committee
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AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Notice 2007-88 –New Procedures for
Filing Accounting Method Changes
Developed by the
Form 3115 Task Force
Les Schneider, Chair
David Auclair
Bob Baird
Paul Gibbs
Kim Harrington
Diane Herndon
Christine Turgeon
Robert Weiss
George White, AICPA Technical Manager
January 31, 2008
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Notice 2007-88 –New Procedures for
Filing Accounting Method Changes
BACKGROUND
The Internal Revenue Service had previously requested suggestions from the American Bar
Association Tax Section (ABA) and the American Institute of Certified Public Accountants
(AICPA) about how the IRS might accelerate the process by which accounting method change
requests are reviewed and approved by the IRS National Office (National Office), as well as
reduce the backlog in accounting method change request filings, in order to reduce the resources
that the National Office devotes to this task. After considering comments from these parties, the
IRS issued Notice 2007-88 (the Notice). In the Notice, the IRS offers one potential solution to
the problems that currently exist with respect to the processing of accounting method change
requests. The Notice requests comments on the particular approach proposed in the Notice. The
Notice also invites proposals concerning any other suggested ways of dealing with the problems
in processing accounting method change requests.
In discussions of this issue in public forums, such as at meetings of the ABA Tax Section and the
AICPA Tax Division, a few commentators and officials within the IRS indicated that in their
view, the main source of the problem in processing accounting method change requests is the
large number of accounting method change requests that are filed by taxpayers and the timeconsuming approach under which many of these requests must be processed. These
commentators and officials suggested that the solution to the backlog problem is to make most, if
not all, accounting method change requests eligible to be processed under the automatic consent
procedures, rather than limiting the automatic consent process to routine and non-controversial
types of accounting method change requests. However, even commentators that recommended
making most accounting method change requests eligible for the automatic consent process did
not go so far as to propose the elimination of the regular advance consent process for taxpayers
that preferred such an approach, in contrast to the proposal in the Notice.
The AICPA suggested that the backlog problem involving accounting method change requests is
not caused by the sheer volume of advance consent method change requests, but rather is caused
primarily by the manner in which such requests are processed by the National Office. Thus, we
proposed changes to the way that advance consent method change requests are reviewed and
processed by the National Office.
The Notice proposes a system for handling accounting method change requests that essentially
divides method change requests into two principal tracks – automatic and letter rulings, although
as noted below, the Notice actually creates five different categories of accounting method change
requests. As noted below, while the Notice nominally provides for a third track for certain
accounting method change requests that would continue to be processed under the current
advance consent procedures, it seems apparent that this third track is reserved for a very limited
number of accounting method changes.
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As the centerpiece of its proposal to revamp the way accounting method change requests are
handled, the Notice proposes that the principal track for filing accounting method change
requests would be the automatic consent track, which the Notice labels the “standard consent
process.” While some commentators had recommended that this automatic consent approach be
made optional for most accounting method changes, the proposal in the Notice goes further and
basically restricts the processing of method change requests to the automatic consent approach,
unless the taxpayer is eligible to file a formal letter ruling request or falls into the narrow
category of situations in which the current advance consent process would be retained. Under
this standard (automatic) consent track, a taxpayer would follow procedures resembling the
present automatic consent procedures in Rev. Proc. 2002-9. Under the standard consent process,
National Office consent to change the method of accounting would be presumed unless the
taxpayer is notified to the contrary by the National Office.
As mentioned above, the Notice also proposes a second track that in form resembles the present
advance consent process. The Notice labels this track the “specific consent process.” However,
this track would be reserved for two very limited categories of method changes: (1) method
change requests that are specifically identified in published guidance as requiring the IRS’
advance consent; and (2) method change requests that would ordinarily be eligible for the
standard consent process, but where the taxpayer either requests non-standard terms and
conditions or a waiver of certain scope restrictions. Spokespersons from the National Office
have suggested that these two categories would be quite limited in scope, so that most accounting
method change requests will be eligible for the automatic consent process under the standard
consent track.
Finally, for accounting method change requests (other than those specifically designated as
automatic that are required to be filed under the standard consent track and those few method
changes covered by the specific consent track), if the taxpayer desires a National Office consent
letter, the only alternative offered by the Notice is a track whereby the taxpayer would file a
letter ruling request. The Notice labels this track the “letter ruling consent process.” Under this
track, the taxpayer would seek a formal letter ruling from the IRS National Office, although the
Notice does not make clear how this track would differ from an advance consent method change
request under current procedures.
As the Notice indicates, each of the foregoing tracks contains different rules and each track has
different consequences for the taxpayer. For example, accounting method changes described in
Rev. Proc. 2002-9 would obtain audit protection (i.e., protection against IRS agents challenging
the taxpayer’s prior method in an audit of a prior year) and ruling protection (i.e., protection
against IRS agents challenging the propriety of the new method), whereas accounting method
changes not described in Rev. Proc. 2002-9 receive audit protection, but not ruling protection.
The AICPA reviewed the Notice and offers the following c evaluation of the proposals in the
Notice, as well as suggestions for an alternative approach.
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REASONS FOR BACKLOG IN PRESENT SYSTEM
In a letter to Associate Chief Counsel (Income Tax and Accounting), Lewis J. Fernandez, dated
March 5, 2007, the AICPA expressed its views on the subject of the backlog of accounting
method change requests, the causes of the backlog, and some ideas for streamlining the
procedures by which the National Office processes accounting method change requests. In that
letter, we noted that if one of the reasons for the backlog in accounting method change requests
is the volume of advance consent requests, the solution to this problem would not be to make
virtually all accounting method changes automatic. Instead, a better solution to this problem
would be for the National Office to expand, on a targeted basis, the types of specificallyidentified accounting method changes that may be filed under automatic consent procedures.
The AICPA has previously made suggestions as to the types of accounting method changes that
should be eligible for the automatic consent process and would be pleased to continue to offer
suggestions for additional specific types of accounting method change requests that should be
made automatic in the future.
In our prior letter, we maintained that the other main cause of the backlog in accounting method
change requests is the manner in which such requests are processed by the National Office. This
conclusion was based on members’ experiences that reflect the fact that most routine types of
advance consent accounting method change requests are processed expeditiously by the National
Office and do not appear to consume an unreasonable amount of the National Office’s time. In
contrast, members often experience extensive delays during the processing of certain types of
complex accounting method change requests where there are repeated requests for additional
information from the National Office or where the National Office is uncertain as to whether to
grant the request.
In these circumstances, it is frequently the case that the National Office representative
responsible for reviewing the accounting method change request is not limiting his or her review
to a determination as to whether the proposed method of accounting is proper and would clearly
reflect the taxpayer’s income, but instead the National Office representative conducts what
amounts to an “audit” of the taxpayer’s proposed method of accounting in order to ascertain
whether the National Office agrees with every detail of the taxpayer’s proposed method of
accounting. In such circumstances, the National Office representative requests inordinate
amounts of detailed information concerning the application of the proposed method of
accounting to particular transactions, even when the taxpayer is not seeking a ruling as to that
detailed application.
Two recent examples of this type of approach to processing accounting method change requests
readily come to mind and are illustrative of the broader problem. In one example, a taxpayer
requested permission to change from the percentage of completion method to an accrual method
of accounting for service contracts that have been improperly classified as long-term contracts.
In those circumstances, there is no doubt that an accrual method is the proper and appropriate
method of accounting for such contracts and the only issue that should be considered by the
National Office in processing the method change request is whether the nature of the contracts
makes it clear that Section 460 is inapplicable. However, in these types of accounting method
change requests, the National Office will frequently consider collateral issues such as the proper
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time for the taxpayer to recognize revenue and expenses under the proposed accrual method,
even if the taxpayer did not request such a ruling.
In another example, a taxpayer using a so-called “other” allocation method under the uniform
capitalization method (UNICAP) requested permission to include a particular type of cost in
inventoriable costs that had been inadvertently excluded from inventory. In that circumstance,
the National Office will often request details about the taxpayer’s UNICAP allocation method,
even though the allocation method is not the subject of the accounting method change request
and no such review was requested by the taxpayer.
These are just two examples of common situations where the National Office goes far beyond
what is necessary in order to determine whether the taxpayer’s proposed method of accounting is
proper and, instead, the National Office in effect conducts an audit of the application of the
proposed method of accounting, even though the proposed method, on its face, is a permissible
and proper method. What makes this process even more inefficient and frustrating is that despite
the fact that the National Office engages in such a detailed “audit” of the proposed method of
accounting, the consent letter that the National Office normally issues at the conclusion of this
process is nevertheless generic in form and makes no mention of any of the detailed
implementation issues that the National Office spent months or years considering. As a result,
the generic consent letter does not provide the taxpayer with any type of meaningful ruling
protection concerning the issues that the taxpayer spent so much time trying to resolve with the
National Office.
MAKING MOST ACCOUNTING METHOD CHANGE REQUESTS AUTOMATIC IS
NOT THE SOLUTION FOR THE BACKLOG PROBLEM
In light of the our perception of the reasons for the backlog in processing advance consent
accounting method change requests, we submit that the solution to the problem proposed in the
Notice – to make virtually all accounting method changes automatic and eliminate the
procedures by which advance consent method changes may be filed in a form that is not a formal
letter ruling request -- is the wrong solution, particularly where that approach is mandatory. The
We base our conclusion on several reasons.
First, the National Office’s review of advance consent method change requests is an important
aspect of the National Office’s duties that reflects a mandate from Congress that the
Commissioner of Internal Revenue approve accounting method changes that taxpayers seek to
implement. Such review gives the National Office an important advance look at what
methodologies taxpayers are following in the accounting method arena. We are concerned that if
most accounting method change requests are processed as automatic consent method changes,
the frequency and level of review of accounting method change requests could result in the
National Office overlooking emerging reporting positions that would best be dealt with before
these positions are reflected in federal income tax returns. This result is exacerbated by the fact
that taxpayers typically include considerably less detailed descriptions of their proposed methods
when accounting method change requests are filed under the automatic consent procedures, in
comparison to the disclosures that are made in filings under the advance consent procedures.
Page 5
Second, the current advance consent procedures insure uniformity in the handling of accounting
method change requests. Because the handling of accounting method change requests is
centralized in one branch based on the subject matter of the accounting method change, it is
unlikely that similarly-situated taxpayers will be treated differently. In contrast, if most
accounting method changes are processed under automatic consent procedures, the result will be
a tremendous amount of inconsistency in the way that method changes are reviewed and
approved. We believe this change in procedures will result in a considerable amount of
inconsistencies because if most accounting method changes are processed under automatic
consent procedures, the IRS examination divisions will assume greater responsibility for
monitoring accounting method changes. We are concerned that if the approval of most
accounting method changes is left up to the IRS examination division, different IRS agents may
adopt different approaches in dealing with the same type of accounting method change. Thus, a
particular method change might be approved in one taxpayer’s case, but not in another
taxpayer’s case. There would not be any procedures in place to assure uniformity of outcome, as
is the case today where the National Office must approve all advance consent method change
requests. While such inconsistencies may potentially be resolved with resort to the technical
advice or field service advice process, taxpayers will not necessarily be aware of the fact that
similarly-situated taxpayers have been treated differently and request that technical advice or
field service advice procedures be employed. Moreover, the technical advice and field services
advice procedures are time consuming and amount to a further drain on the National Office’s
resources.
The AICPA believes that a third reason why making most accounting method change requests
automatic is not appropriate is that greater controversy surrounding the propriety of taxpayers’
accounting method changes would be an unavoidable by-product of the standard consent process
proposed in the Notice. We regard the National Office as a much more independent, objective,
and unbiased arbiter of the propriety of a taxpayer’s accounting methods than the IRS
examination division. When accounting method changes are reviewed in the context of the
examination process, the review is much more adversarial in nature than in the case of National
Office review. In the our opinion, such controversy is avoided under the current automatic
consent procedures because the automatic change process currently is limited to accounting
method changes that everyone recognizes are routine (i.e., changes to clearly permissible
methods of accounting that are not controversial). While there are undoubtedly additional types
of accounting method changes with these characteristics, this does not lead to the conclusion that
the privilege of filing an accounting method change request under the automatic consent
procedures should be extended to virtually every type of accounting method change.
Extending the automatic consent process to virtually every type of accounting method change
would inevitably lead to greater uncertainties as to the eventual outcome of the request, which
moves in the opposite direction of what taxpayers need under FIN 48. We submit that taxpayers
seek some level of certainty when they file an accounting method change request. In contrast to
an isolated tax return position, accounting systems frequently must be modified at the time that a
new method of accounting is implemented. Taxpayers in such a position cannot accept the
possibility that several years later they may be examined for the year of the method change and
be retroactively denied the use of the proposed method at a time when their accounting system
Page 6
has not been designed to provide the information needed to employ some other method of
accounting.
The AICPA recognizes that the National Office cannot give this type of ruling protection and
certainty, which is typical of a letter ruling, under an automatic consent procedure. However, the
National Office should understand that because such ruling protection will not be available under
the proposed standard (automatic) consent procedure, many taxpayers will have no choice but to
request a letter ruling under the procedures proposed in the Notice, rather than making use of the
proposed standard consent process.
Finally, we are concerned that the proposal in the Notice will not reduce the burden on National
Office resources. We believe that a significant proportion of taxpayers may opt for the letter
ruling request process, since that would be the only way under the procedures proposed in the
Notice that taxpayers would secure a National Office consent letter with respect to an accounting
method change. This conclusion is based on the view that, except in the case of the most routine
types of accounting method changes, taxpayers will want both audit and ruling protection of the
type now afforded by an advance consent accounting method change request. However, even if
it turns out that taxpayers initially opt for the automatic consent procedures under the standard
consent track in the Notice, in the end, the AICPA believe that unfavorable audit experience will
cause increasing numbers of taxpayers to file letter ruling requests. That outcome would not
further the goal of reducing the National Office resources devoted to accounting method
changes.
AICPA PROPOSAL
In the AICPA’s view, the cure for the problem of the backlog in accounting method change
requests under the current system, aside from identifying additional specific routine types of
accounting method change requests that should be made eligible for the automatic consent
process, is to retain the present system for filing accounting method change requests, but divide
such system into two distinct filing tracks for advance consent method change requests. Each
track would have its own set of ground rules governing the process by which the National Office
reviews the taxpayer’s proposed method of accounting.
Under this new approach, the taxpayer, rather than the National Office, would determine the
level of detail of the National Office’s review by selecting the particular advance consent track
that the taxpayer wishes to pursue. If the taxpayer selects the track that more closely resembles a
letter ruling request, the taxpayer would submit detailed information both with respect to the
proposed method and the detailed application of the proposed method to particular transactions.
In return, the taxpayer would obtain a consent letter that offered both audit and ruling protection
not only as to the propriety of the proposed method, but also as to the application of the proposed
method to the particular transactions addressed in the method change request.
In contrast, if the taxpayer selected the filing track that resembles the present advance consent
method change request, the taxpayer would not submit detailed information concerning the
application of the proposed method to particular transactions and the taxpayer would not expect
detailed National Office review of the application of the proposed method to particular
Page 7
transactions. If the taxpayer files a request under this track, the taxpayer would expect to receive
a consent letter from the National Office confirming audit and ruling protection only with respect
to the propriety of the proposed method of accounting. Under this alternative, the application of
the proposed method to particular transactions would not be considered by the National Office,
but would be subject to detailed review by the IRS examination division.
Using one of the examples discussed above as an illustration of how this proposal would work, if
a taxpayer requests permission to change from the percentage of completion method to an
accrual method of accounting for service contracts that are not long-term contracts, but the
taxpayer is not interested in obtaining a letter ruling from the National Office with respect to
when revenue and expenses would accrue in particular types of contracts, the taxpayer would
follow the method change track whereby the taxpayer would simply request a change from the
percentage-of-completion method to an accrual method. As a result, the taxpayer would not
need to provide detailed information to the National Office, nor would the National Office
request any detailed information, about the taxpayer’s contracts with customers or the taxpayer’s
proposed method, other than that which is necessary to establish that the taxpayer’s contracts are
not long-term contracts. However, based on the taxpayer’s limited type of accounting method
change request, the consent letter issued to the taxpayer would explicitly state that the National
Office’s consent was limited to whether an accrual method is proper for the taxpayer’s types of
service contracts and no ruling protection would be extended in the consent letter to the details of
the taxpayer’s reporting of revenue or expenses from such contracts on the new accrual method.
Alternatively, if the taxpayer chose the letter ruling track, the taxpayer could file its accounting
method change request as a letter ruling request with respect to the proposed treatment of
revenue and expenses for particular types of contracts under the proposed accrual method of
accounting. Under that alternative approach, the taxpayer would be obligated to include in the
accounting method change request sufficient information on which such a ruling could be based,
and the consent letter that is issued by the National Office would state explicitly that the National
Office had reviewed particular types of contracts and was granting consent both as to the use of
an accrual method and as to the specific details of the timing of the recognition of revenue and
expenses on the types of contracts furnished by the taxpayer. The taxpayer in this case would
receive ruling protection not only as to the propriety of the proposed accrual method, but also as
to the propriety of the proposed timing of contract revenue and expense recognition for those
types of contracts submitted with the accounting method change request.
In general, the National Office would not be permitted on its own to transform the first type of
request outlined above (i.e., bare consent request to use an accrual method) into the second type
of request (i.e., a letter ruling request as to the details of the timing of revenue and expense
recognition under an accrual method) merely because the National Office is interested in that
subject or because the National Office is not sure whether it agrees with the taxpayer’s possible
treatment of revenue and expense recognition under the proposed method. Notwithstanding the
foregoing limitation, the we understand that there may be certain types of accounting method
change requests that are so narrowly targeted (such as where the accounting method change
request itself requests permission to change the time when revenue is recognized under an
accrual method for a particular type of transaction), that it may be necessary for the taxpayer to
provide more detailed information in order for the National Office to be able to determine
Page 8
whether the proposed method of accounting is a proper method of accounting. However, even in
these types of circumstances, it should be made clear that the National Office will not be
permitted to transform the information gathering process into a detailed “audit” of the taxpayer’s
proposed method of accounting and, if the National Office chooses to expand its inquiry into an
aspect of the taxpayer’s proposed method, the taxpayer will receive ruling protection with
respect to that aspect of the proposed method that the National Office specifically reviews and
determines to be proper.
In response to this proposal, some commentators have questioned the need for a bare consent
process and have expressed doubts as to whether taxpayers obtain any greater protection when
they have received a bare consent letter issued under the advance consent method change request
process. There are two responses to this contention.
First, there are types of method changes which are so specific that there is no difference in effect
between a bare consent letter and a letter ruling. For example, an accounting method change
request might be filed by a taxpayer already using an accrual method who seeks to change the
time for deducting a particular type of expense under the “all-events” test, as modified by section
461(h). Assume that the National Office reviews the taxpayer’s proposed timing of the
deductions and approves the method change request. The consent letter that would be issued in
those circumstances necessarily affords the taxpayer ruling protection with respect to the
taxpayer’s timing of the deduction under the proposed method of accounting, even if the consent
letter is not in the form of a letter ruling. In that circumstance, because the proposed method
change is so narrowly defined, the issuance of a bare consent letter would constitute explicit
National Office approval of the application of the proposed method to a particular transaction
and would confer on the taxpayer both audit and ruling protection.
In contrast, if the taxpayer were to file that same type of accounting method change request
under the standard (automatic) consent approach proposed in the Notice, the taxpayer would not
receive ruling protection of any kind. Thus, if on examination, an IRS agent were to challenge
the timing of the taxpayer’s deductions as not satisfying the “all-events test,” the taxpayer and
the IRS might commit significant resources to resolving this controversy, whereas this
controversy could have been avoided if the taxpayer were eligible to seek a bare consent letter
approving the taxpayer’s method change request.
The other situation where bare consent is important under the present advance consent
procedures is where the taxpayer includes in its method change request detailed information
about the application of the proposed method even though the method change request is not filed
as a formal ruling request. In that circumstance, the IRS National Office usually will review the
detailed application of the proposed method as part of its processing of the taxpayer’s accounting
method change request, which is often evidenced by written communications between the IRS
National Office and the taxpayer. In that circumstance, even if the IRS ultimately issues a bare
consent letter, the taxpayer frequently will be able to demonstrate to an IRS agent on
examination that the application of the method was reviewed by the National Office as part of its
processing of the method change request. While the taxpayer would not be legally entitled to
ruling protection, the taxpayer would be in a stronger position, in practical terms, when
defending its application of the proposed method on audit. Elimination of the advance consent
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process apart from a letter ruling would remove this important consequence of obtaining a bare
consent letter.
COMMENTS ABOUT THE NOTICE PROPOSAL
In the event these suggestions are not adopted and some variation of the proposal in the Notice is
instead adopted, we offer the following specific comments about the approach proposed in the
Notice.
A. Creating Five Categories of Method Changes
One major criticism of the Notice is that while it purports to simplify the accounting method
change request procedures, the Notice in fact complicates the existing procedures by creating
five different major categories of accounting method change requests within the three basic
procedural processing tracks. Moreover, each category of change would have different rules,
different procedures, and different consequences.
The categories of changes that the Notice would create are: (1) method changes qualifying for
standard (automatic) consent for method changes listed in Rev. Proc. 2002-9 (or its successor);
(2) method changes qualifying for standard (automatic) consent for method changes not listed in
Rev. Proc. 2002-9 (or its successor); (3) method changes requiring specific consent because the
taxpayer requests different terms and conditions than are expressly provided under the standard
(automatic) consent process; (4) method changes requiring specific consent because the changes
are identified as being expressly ineligible for the standard consent procedures; and (5) letter
ruling requests. We do not believe that the creation of five different types of method change
procedures with different rules and different consequences simplifies the procedures for
taxpayers or speeds up the process.
In our view, the final three categories of accounting method changes (all those requests that do
not qualify for the standard consent process) could be combined into a single advance consent
method change request category. That combined category could then be treated either as a
specific consent method change or a letter ruling, depending on which alternative the taxpayer
selected. As the Notice is presently drafted, it is very unclear what differences are intended
among the three types of accounting method changes that are not eligible to be filed under the
standard consent process.
B. Eliminating “Bare Consent”
Even if the National Office ultimately adopts the proposal to make most accounting method
change requests eligible for automatic consent, we submit that such action does not necessitate
the virtual elimination of bare consent accounting method change requests. For the reasons
stated in preceding sections, bare consent method changes perform a much needed function for
taxpayers that want a written consent letter from the National Office, but do not wish to incur the
time and expense involved in seeking a formal letter ruling.
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C. Availability of Audit Protection for Standard (Automatic) Consent Method Changes
The Background section of the Notice states that a taxpayer making an automatic consent
method change under Rev. Proc. 2002-9 currently obtains audit protection, subject to the
limitations contained in section 8 of Rev. Proc. 2002-9. (Section 8 may require a taxpayer to
modify a previous accounting method change by reason of new legislation, a Supreme Court
decision, new regulations, the issuance of a revenue ruling or other provisions in an Internal
Revenue Bulletin, or the issuance of a written notice to the taxpayer that the method change is no
longer in accordance with IRS policy or material facts have changed.) Moreover, the Notice
would extend that audit protection to newly-added standard (automatic) consent method changes
that are not presently covered by Rev. Proc. 2002-9.
However, the Notice fails to address the controversy that currently exists concerning audit
protection for automatic consent method changes covered by Rev. Proc. 2002-9. While Rev.
Proc. 2002-9 nominally conveys audit protection to taxpayers that are eligible for an automatic
consent method change under Rev. Proc. 2002-9, that audit protection is subject not only to the
provisions in section 8, but also to the provisions in section 9.02 of Rev. Proc. 2002-9. Section
9.02 of Rev. Proc. 2002-9 grants an IRS agent the discretion to deny consent for the method
change if the method change is not implemented in accordance with the provisions of the
revenue procedure. Our members have encountered a position advanced by many IRS agents
that if the agent does not agree with every detail of the application of a taxpayer’s new method of
accounting, the agent has the authority under Section 9.02 of Rev. Proc. 2002-9 to deny the
method change and place the taxpayer either back on its old method of accounting or change the
taxpayer to a method different from the method the taxpayer requested.
Without any modification to the provisions in Section 9.02 of Rev. Proc. 2002-9, audit protection
will be an illusory benefit in many cases. Accordingly, the National Office should clarify and
limit the intended scope of Section 9.02 of Rev. Proc. 2002-9 in any new automatic consent
procedure. As such, provided the taxpayer is otherwise in compliance with Section 9.01 of Rev.
Proc. 2002-9 (i.e., the taxpayer’s representations in the method change request were accurate, the
amount of the section 481(a) adjustment was properly determined, and the method change was
implemented in compliance with the provisions of any applicable revenue procedure), we
recommend modifying Section 9.02 to limit its scope, restricting an IRS agent to challenging
either (1) the propriety of the method to which the taxpayer changed only if it is determined that
the taxpayer is ineligible to use such method; or (2) the application of the method to particular
transactions if it is determined that the taxpayer’s application of such method is deficient.
Furthermore, provided the taxpayer is otherwise in compliance with Section 9.01 of Rev. Proc.
2002-9, we recommend that an IRS agent’s authority be limited to taking the following action:
(1) revoking the method change only if it is determined that the taxpayer is ineligible to use the
proposed method; or (2) making any adjustments (including modifying the amount of the section
481(a) adjustment) that are necessary to bring the application of the proposed method to
particular transactions into compliance with the requirements of the tax law without terminating
the taxpayer’s use of the method to which the taxpayer changed.
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D. Availability of Ruling Protection for Standard (Automatic) Consent Method Changes
The Notice’s discussion of ruling protection fails to appreciate the nature of ruling protection that
is provided under the current procedures and the nature of ruling protection that taxpayers need.
First, for accounting method changes that are presently covered by Rev. Proc. 2002-9, ruling
protection is not particularly significant because all of the categories of accounting methods
currently listed in Rev. Proc. 2002-9 have been individually evaluated by the National Office so
that there is no doubt as to their propriety.
What the Notice fails to mention is that the ruling protection that a taxpayer typically wants and
needs is not with respect to the propriety of the proposed method described in Rev. Proc. 2002-9
(e.g., whether a taxpayer may use an accrual method), but rather as to the detailed application of
the new method (e.g., the timing of revenue recognition under the proposed accrual method).
However, that type of ruling protection is also not available under Rev. Proc. 2002-9 because the
details of the taxpayer’s application of the new method are not addressed in Rev. Proc. 2002-9,
nor are these details disclosed in the taxpayer’s accounting method change request.
In contrast, the Notice would expressly deny ruling protection for accounting method changes
not currently listed in Rev. Proc. 2002-9 (or its predecessor) that would become eligible for the
standard (automatic) consent process under the procedures proposed in the Notice. While we
have no quarrel with this position since the National Office has not officially sanctioned the
proposed method as permissible, the National Office should understand that it is the absence of
ruling protection in these circumstances, particularly where the propriety of the proposed method
is uncertain, that may drive taxpayers away from the standard consent approach and towards the
letter ruling process.
E. Procedures for Reviewing Standard (Automatic) Consent Method Change Requests
Another major shortcoming of the proposal in the Notice is the way that the National Office
would review standard (automatic) consent method change requests. First, the Notice indicates
that there will continue to be National Office review of standard (automatic) consent method
change requests. By itself, this process seems to insure that processing times for accounting
method changes would not be reduced unless the focus of the review changes.
Second, we predict that the ground rules of the National Office’s new review process, as outlined
in the Notice, will aggravate the uncertainty that the standard consent process would promote.
The Notice explains that while all standard (automatic) consent method change requests will still
be reviewed by the National Office, initially that review will be conducted without the taxpayer’s
knowledge. Where warranted based on the National Office’s initial review, the National Office
will contact the taxpayer and ask for additional information from the taxpayer. However, even
where the National Office contacts the taxpayer for additional information and then agrees with
the taxpayer’s proposed method, the process still would end without the issuance of either a
consent letter or any other formal indication that the National Office reviewed and approved of
the taxpayer’s proposed method. In contrast, if the National Office reviews the automatic
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method change under the current procedures, the taxpayer is normally notified by the National
Office of its ultimate acceptance or denial of the change even though a formal consent letter is
not issued.
With many taxpayers now being subjected to the requirements of FIN 48, we believe that
taxpayers will find this new review process unsatisfactory. First, many taxpayers may never
learn whether their method change request was even reviewed by the National Office, leaving
taxpayers in the uncertain situation of not knowing whether their proposed method is acceptable
to the IRS until the statute of limitations expires for the year of the change.
Second, even where the taxpayer is contacted by the National Office under this new review
process, the taxpayer will not receive anything in writing from the National Office to show the
IRS agent that the National Office agreed with the taxpayer’s proposed method of accounting. In
those circumstances, there is nothing to prevent an IRS agent from reexamining the same issues
that the National Office considered during its review of the standard (automatic) consent method
change request. In our opinion, if the National Office reviews a particular issue during its
consideration of the standard (automatic) consent method change request, taxpayers should
receive some type of written confirmation to demonstrate to the taxpayer and to an IRS agent
that the new method was explicitly examined by the National Office, so that the agent does not
need to review the same method again.
F. Consequences of an Incomplete Form 3115
We submit that the requirement in the Notice that a Form 3115 be substantially complete when
filed, or the standard (automatic) consent method change request will be retroactively denied, is
both unrealistic and unduly harsh. There are so many different types of accounting methods that
it is rarely possible for taxpayers to know with certainty how much of the details of the proposed
method of accounting must be disclosed in the Form 3115.
For example, an accounting method change request to comply with the INDOPCO regulations in
reg. sections 1.263(a)-4 and -5 is eligible for the automatic consent process under the current
version of Rev. Proc. 2002-9. However, subsets of a method change to comply with these
regulations also include a change with respect to each sub-method within the regulations,
including for example a change in the treatment of package design expenses, costs to obtain
customer supply contracts, the treatment of particular prepaid expenses with less than a one-year
life, and the treatment of investigatory costs in a corporate acquisition. Each of these submethods in turn is comprised of multiple sub-methods, each with its own set of choices and
elections. There is no end to the level of detailed sub-methods embodied in the overall method.
In these circumstances, it will be very difficult to determine what information is necessary to
satisfy the “substantially complete” standard in the Notice
Moreover, there are many other types of accounting method changes like the one described
above. Is the IRS going to publish an encyclopedia of required information for every type of
accounting method change request? While the Notice indicates that examples of what
information must be disclosed in the Form 3115 will be published, and such generic guidance on
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disclosures in a Form 3115 is sorely needed, the issuance of such guidance should not serve as a
basis for dismissing an incomplete Form 3115. It is difficult to see how any generic guidance
could be drafted in a manner that will enable taxpayers to be confident that they have disclosed
sufficient information in every type of standard consent method change request. There are
simply too many different types of method change requests to cover a sufficient number of them
in any published guidance.
Finally, the drastic consequences that result from filing a Form 3115 that is subsequently
determined to be not substantially complete will unfairly penalize small taxpayers that are not
familiar with the detailed filing requirements. Many of such filers lack the expertise and
experience to make an informed judgment about what type of information is required in an
accounting method change request.
In conclusion, taxpayers should have the opportunity to provide additional information without
prejudicing their accounting methods.
COMMENTS ON THE PROPOSED LETTER RULING PROCESS
As noted above, we suggest eliminating the separate procedures for two types of method changes
– (1) accounting method changes specifically ineligible for the standard (automatic) consent
process; and (2) specific consent accounting method changes where a taxpayer requests nonstandard terms and conditions –and incorporating both situations into the letter ruling
procedures. Accordingly, suggested changes to the letter ruling procedures would be applicable
to these other two categories of method changes in the Notice.
Overall, we are uncertain whether the Notice’s proposed letter ruling process is intended to differ
significantly from the current advance consent process. As noted in outstanding administrative
pronouncements, under the current process, an advance consent accounting method change
request is treated as a letter ruling request and the standard accounting method change consent
letter that is issued by the National Office is treated as a letter ruling under the current procedural
rules.
However, we understand that the National Office believes that under current procedures,
taxpayers often do not provide enough information in the request to enable the National Office to
evaluate the propriety of the accounting method change that is being requested. Accordingly,
some explanation of the expected differences, if any, between the current advance consent
process and the letter ruling process proposed in the Notice would be welcome.
A. Filing Fees
At present, there is a substantial difference in the filing fee for an ordinary letter ruling request
(i.e., $11,500, effective February 1, 2008) compared with an advance consent accounting method
change request (i.e., $3,800, effective February 1, 2008), notwithstanding that an accounting
method change request is currently treated as a letter ruling request. We submit that it would be
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completely unfair and harsh to apply the current filing fee for ordinary letter ruling requests to
accounting method change requests that are filed under the proposed letter ruling request process
outlined in the Notice. As noted above, taxpayers who would have obtained the protection they
need with a consent letter under the current system may feel compelled, if the procedures
proposed by the Notice were adopted, to file a letter ruling request instead of relying on the
standard (automatic) consent process. Those taxpayers who file letter ruling requests in order to
obtain the same level of protection that they currently receive from advance consent method
change consent letters should not be penalized in these circumstances by being subjected to
greatly elevated filing fees.
Moreover, if the National Office decides to make the filing fee for accounting method change
letter ruling requests under the proposal in the Notice higher than the current filing fee for
advance consent accounting method change requests, there should at a minimum be a reduced
filing fee for letter ruling requests relating to accounting method change requests for small and
mid-size taxpayers. A filing fee for an ordinary letter ruling request, which increases to $11,500
on February 1, 2008, would pose a significant burden for small and mid-sized taxpayers.
B. Time for Filing
The Notice indicates that in view of the level of review required for a letter ruling request,
perhaps there should be an earlier deadline for filing a letter ruling request than the current
deadline for filing advance consent accounting method change requests under current
procedures. The Notice indicates that one possibility would be to impose a filing deadline of the
first nine months of the taxable year for which the change would be effective, with changes filed
during the final three months of a taxable year being treated as timely filed for the immediately
succeeding taxable year.
First, even under the current procedures, a taxpayer may simply file a method change request at
an early point during the year of change if an answer from the National Office is required before
the tax return for the year of change is filed. Second, if an early response from the National
Office is not needed by the taxpayer, the issuance of Rev. Proc. 2007-67 offers a reasonable way
to avoid the filing of an amended return, with the taxpayer electing to roll over the year of
change to the next taxable year. Thus, in our opinion, these two alternatives argue against any
change in the filing deadlines for advance consent accounting method change requests.
Moreover, short of adopting a fixed early deadline for filing an advance consent method change
request, a preferable approach would be to simply offer taxpayers an option of an earlier filing
deadline in exchange for which the taxpayer would be assured that the method change request
would receive sufficient expedited treatment that the taxpayer could expect the issuance of a
consent letter within six months following the end of the year of change. In this fashion, some
taxpayers may be encouraged to file their advance consent method change requests earlier than
the end of the year of change. However, taxpayers filing after such an early deadline, but prior
to the end of the year of change, should still be entitled to a consent letter for the year of change
if the taxpayer doesn’t mind waiting for the issuance of the consent letter and possibly having to
file an amended return if the consent letter is issued after the tax return is filed.
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However, if an earlier deadline for filing an advance consent accounting method change request
is nonetheless adopted, we suggest that the filing deadline be no earlier than the end of ten
months from the beginning of the year of change, rather than the nine-month deadline proposed
in the Notice. The reason we recommend that the filing deadline be no earlier than ten months
from the beginning of the year of change, is that the need for an accounting method change
frequently does not become apparent until a taxpayer completes the process of preparing its
federal income tax returns. For many taxpayers, that process is completed near the extended due
date for filing the federal income tax return, which is 8 ½ months after the end of the year for
which the return is to be filed. In such circumstances, a nine-month deadline for filing an
advance consent method change request would afford a taxpayer only a two-week window after
filing the tax return in which to prepare the method change request. Moreover, following the
filing of federal income tax returns, most taxpayers are busy preparing and filing state tax returns
until the 15th day of the 10th month.
For these reasons, taxpayers would be better able to meet the requirements for filing a method
change request if the taxpayer had six weeks after the federal income tax return was filed in
which to prepare and file the accounting method change request. Accordingly, the AICPA
recommends that any acceleration of the deadline for filing advance consent method change
requests or letter ruling requests be limited to ten months after the beginning of a taxable year.
An additional point to note is that if the deadline for filing an advance consent method change
request or letter ruling request is reduced to the first nine or ten months of a taxable year,
consideration should be given to providing an additional window period to correspond with the
last three months of that shortened filing deadline. Such a change would enable coordinated
examination taxpayers that are under continuous audit to benefit from filing accounting method
change requests within the new deadline.
Finally, there is a suggestion in the Notice that a shortened filing deadline might be imposed on
certain types of standard (automatic) consent method changes. The AICPA believes that
adopting a shortened filing deadline for automatic method changes would seriously undercut the
goal of the automatic process.
C. Method Changes Eligible for Filing as a Letter Ruling Request
As the Notice is presently drafted, accounting method change requests that are currently eligible
for the automatic consent process under Rev. Proc. 2002-9 would not be eligible for filing under
the letter ruling process. Since implementation issues exist for all types of automatic method
changes, whether or not the method is specifically covered by Rev. Proc. 2002-9, the AICPA
believes that all standard (automatic) consent changes should be eligible for the new letter ruling
request process. In the case of standard (automatic) consent changes that are covered by Rev.
Proc. 2002-9, it could be made clear that the ruling being sought must relate to the detailed
application of the proposed method, not just the propriety of the proposed method.
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IMPLEMENTING A PILOT PROGRAM
The Notice states that any new accounting method change procedure would first be implemented
through a pilot program. While the establishment of a pilot program seems sound, the AICPA
submits that in order to evaluate the merits of any new procedure, particularly as it relates to
interactions with the IRS examination division, the pilot program would need to remain in effect
for a number of years in order to determine whether the process is working properly.
An accounting method change would ordinarily not be examined until several years after it was
implemented. The examination of standard (automatic) consent method changes under the
proposed procedures would represent an important part of the overall process that would need to
be evaluated. As discussed above, the examination stage is the part of the process where the
AICPA anticipates the greatest problem under the procedures proposed in the Notice.
Accordingly, the pilot program should be of sufficient duration to be able to fully evaluate all of
the effects of any new filing procedures.