IRS revises Form 3115 and Instructions, for accounting method changes

Form 3115, application for accounting method changes

The IRS on January 19, 2016, posted on its website a revised Form 3115, Application for Change in Accounting Method, and Instructions (with a revision date of December 2015) to incorporate changes to the revised procedures for requesting accounting method changes made by Rev. Proc. 2015-13. Form 3115 has been slightly reorganized; a few questions on the prior version of Form 3115 have been removed; and several new questions have been added. The Instructions contain more helpful material and guidance on information needed to respond fully to the questions on the form than the prior version of the Instructions.

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Read a January 2016 report prepared by KPMG LLP providing a more detailed description of changes to Form 3115 and the Instructions.

Summary of changes

Duplicate copy: A change in accounting method made under the automatic consent procedures generally requires the taxpayer to file (1) a duplicate copy of the application with IRS (in Ogden, Utah) and (2) the original application with the relevant federal income tax return.  As of January 2016, the duplicate copy now must be sent to the following address in Covington, Kentucky, instead of Ogden, Utah:

 

Internal Revenue Service
201 West Rivercenter Blvd.
PIN Team Mail Stop 97
Covington, Kentucky  41011-1424

 

Accordingly, taxpayers must mail the duplicate copy of their automatic accounting method change to Covington, Kentucky.  This change in address was also included in Section 9.05(2) of Rev. Proc. 2016-1.

 

Legal basis: On the prior version of Form 3115, only non-automatic method changes had to provide an explanation of the legal basis supporting the proposed method of accounting (now Question 16, previously Question 19). The new version of Form 3115 now requires this legal basis analysis to be completed for certain automatic method changes that are specified in the Instructions.  Some common automatic accounting method changes that will require a legal basis explanation are “impermissible to permissible depreciation or amortization changes” (change number 7), and some of the new “disposition changes” under the tangible property regulations (change numbers 205, 206, and 207).  The legal basis must include a detailed and complete description of the facts that explains how the law specifically applies to the taxpayer’s / applicant’s situation and demonstrates that the applicant is authorized to use the proposed method.  

KPMG observation: Based on informal comments made by IRS representatives at an AICPA meeting in November 2015, it appears that this new requirement arose out of situations when the IRS observed certain automatic method changes being filed with insufficient information to confirm whether the applicant qualified to use the automatic change.

 

Audit protection: The question asking if audit protection applies to the change in method of accounting (now Question 7, previously Question 8) has been modified to incorporate the new audit protection rules in Section 8 of Rev. Proc. 2015-13.  Various boxes are provided for the taxpayer / applicant to check to indicate why it receives audit protection, for example, because it is not under examination, or because it is under examination and meets the three-month window.  Now that Form 3115 has been revised to incorporate the new rules, in most cases, an applicant will no longer need to add a label to the form indicating why the applicant receives audit protection; it will just need to check the appropriate box.  However, in certain circumstances discussed in the Instructions, an additional statement or explanation will need to be attached.

 

Designated automatic accounting method change: Form 3115 and Instructions introduce a new acronym, DCN, which is defined as “designated automatic accounting method change.”  This acronym is used throughout the Instructions, and the list of automatic accounting method changes is now referred to as the “List of DCNs.”

 

For more information, contact a tax professional with KPMG’s Washington National Tax:

Eric Lucas | +1 202 533 3023 | ejlucas@kpmg.com

Karen Messner | +1 202 533 3041 | kmessner@kpmg.com

 

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