Change in accounting method by filing an amended return.
Typically, this is accomplished by filing Form 3115, Application for Change in Accounting Method. However, in some situations, it is possible to change a method of accounting by filing amended tax returns for prior years.
One specific situation in which this can be done is when the taxpayer has adopted an impermissible method of accounting on its originally filed initial return. Prior to the filing of the second return, the taxpayer may file an amended return f or its initial year adopting a permissible accounting method.
The Service supports this theory. In Rev. Rul. 90-38, it stated that an improper method of accounting was considered to be adopted--and therefore could be changed only prospectively with IRS consent--if that method had been treated as such on two consecutive tax returns:
The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns represents consistent treatment of that item . . . the consistent, but erroneous, treatment of material items constitutes a method of accounting.
Similarly, in Rev. Rul. 72-491, the Service allowed a taxpayer who had used an improper method of depreciation on the first income tax return to change and correct the method of accounting by filing an amended return, as long as the return for the second year had not been filed.
Rev. Rul. 90-38 is based to a large extent on Diebold, Inc., Fed. Cir., 1990, aff'g Fed. Cl. Ct., 1989. It is clear from Diebold, particularly the Claims Court decision, that an improper or erroneous method of accounting may be changed retroactively through the filing of an amended first-year return as long as the second year's t,4x return has not been filed. It should be noted that both Rev. Rul. 90-38 and the Diebold case imply that the adoption of a permissible method of accounting is considered to take place with the filing of even the first return. A change in accounting method would then require IRS permission; filing an amended return would not be effective.
It should be noted that, despite Rev. Rul. 90-38 and Diebold, there are many older court cases that take the position that accounting methods can be changed without the Service's consent as long as the statute of limitations for the first year in which the method was adopted has not run. This affords the taxpayer the ability to file amended returns from the beginning.
By filing amended returns going back to the first year of the entity's existence, or at least to the first year of its use of the erroneous method, it is as if the taxpayer had never used the erroneous method.
Similarly, there are cases that have held that the filing of an amended return before the extended due date of the original return is like filing an original tax return; therefore, IRS consent, even for the change from a permissible method, would not be required.
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|Publication:||The Tax Adviser|
|Date:||Dec 1, 1995|
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