Discussion:Making an Accounting Change without filing Form 3115
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Discussion Forum Index --> Tax Questions --> Making an Accounting Change without filing Form 3115
| 13 November 2008 | |
| I have a manufacturing client that has not been capitalizing certain indirect expenses under the UNICAP rules. I just realized it this year, so we are going to do the right thing and make this adjustment with their tax filing. The year is now closed and I just thought that since this a change in accounting, then I should have filed the Form 3115 prior to the close of their year. However, I still want to make the adjustment because I don't want this to be an issue that is discovered in an audit. I seem to be in a pickle on this. I want to do the right thing, but doing the right thing is impossible unless the IRS has given you approval with a timely filed Form 3115.
What is the downside to making the change in accounting without filing the Form 3115? Is an auditor really going to make me reverse the entry that capitalizes these indirect expenses thereby reducing taxable income? If that's the worse that can happen, then that does not sound too bad. | |
| 14 November 2008 | |
Wiles - I'm not an expert on this topic. That said, take a look at Rev Proc 98-60, which provides in pertinent part:
(i) Automatic extension. An automatic extension of 6 months from the due date of the return for the year of change (excluding extensions) is granted to file an application, provided the taxpayer (A) timely filed (including extensions) its federal income tax return for the year of change, (B) files an amended return within the 6-month extension period in a manner that is consistent with the new method of accounting, (C) attaches the original application to the amended return, (D) files a copy of the application with the national office no later than when the original is filed with the amended return, and (E) writes at the top of the application "FILED PURSUANT TO §301.9100-2 ." (ii) Other extensions. A taxpayer that fails to file the application for the year of change as provided in section 6.02(2)(a) or 6.02(2)(b)(i) of this revenue procedure will not be granted an extension of time to file under §301.9100 of the Procedure and Administration Regulations, except in unusual and compelling circumstances. See §301.9100-3(c)(2).''
If you cannot use the automatic extension provision, I would do some careful research in re: part (ii) and the standard of "unusual and compelling circumstances." For example, see PLR-115697-99 where the IRS rejected an attempt to make an untimely request under §301.9100-3. On the other hand, it seems clear that the change results in a method that "more clearly reflects income," thus better compliance with the general rule of 446(a). Further, the PLR I referenced emphasizes that the change would prejudice the government by reducing the tax liability. Thus, there may be PLRs out there that allow an untimely election in your scenario. Again, I'm no expert on this. But hope this at least points you in the right direction. | |
