February 2010 -- Many businesses have contemplated changing one or more of their accounting methods for various reasons. As you are probably aware, there are many accounting methods that can be employed simultaneously, and any changes can impact a myriad of tax related issues and positions. This article is not intended to be a discussion of accounting methods a company might employ, nor an attempt to compare methods. So why read any more? Because timing can be everything, especially when contemplating an accounting method change.
January 1, 2010 was not only the start of another year and the day after many a New Year’s Eve celebration. For calendar year taxpayers, it was an important date, marking the beginning of the “90-day window” within which such taxpayers who are entangled in never-ending audits may qualify to request a change of accounting method. Generally, a taxpayer may not request a change in accounting method if the taxpayer is under examination by the IRS. An exception to this rule is provided in Rev. Proc. 97-27, which allows a taxpayer that has been under audit for at least 12 consecutive months as of the first day of the tax year (in this case, as of January 1, 2010) to request a change in accounting method within the first 90 days of the year. The exception does not apply if the accounting method change is one of the issues under consideration in the audit, and there are a number of factors in determining whether an issue is “under consideration” that are beyond the scope of this article.
What does this mean to you? Typically, a taxpayer wants to change from an impermissible method of accounting to a permissible method, before it gets audited for the issue. Generally, changing to a permissible method of accounting provides the taxpayer with “audit protection” for issues relating to the method change. According to Rev. Proc. 97-27, Section 9.01, when a taxpayer timely files for a change in accounting method for the particular treatment of an item, the IRS will not require the taxpayer to change the method of accounting for this item for any year prior to the year of change. This effectively provides “audit protection” to the taxpayer for the item subject to the method change. In contrast, an accounting method change initiated by the IRS in an exam generally is applied to the earliest open tax year. This “90-day window” provides the best of both worlds for the taxpayer. It allows a taxpayer to change its method of accounting while under audit and receive “audit protection” for prior years regarding the method changed.
So, what should you do if you are in this situation? There are a number of procedural complexities relating to changing accounting methods that are beyond the scope of this discussion. If you feel you may meet the above criteria and would like to explore the opportunity of making a method change using the “90-day window” as described above, please contact your local CBIZ MHM tax advisor to discuss the matter further. We will be happy to help you determine whether these provisions apply to you.
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