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IRS Expands Letter Ruling Opportunities: Pre-Filing Agreements and Automatic Accounting Method Changes

Jun.08.2016

The IRS recently issued Rev. Proc. 2016-30, which expands the scope of pre-filing agreements (PFAs) to include issues that are related to automatic accounting method change applications. To be eligible, the automatic accounting method change request, Form 3115, must have been timely filed, in accordance with the automatic accounting method change procedures.

PFAs allow taxpayers to resolve with the IRS, before the filing of a return, the treatment of issues that otherwise may be disputed in post-filing audits. PFAs provide a level of assurance to taxpayers, because taxpayers can predetermine the IRS’s acceptance of a particular tax treatment or methodology. Accordingly, PFAs have the benefit of reducing the net cost and burden associated with post-filing examinations.

Under prior guidance, it was unclear whether a taxpayer who previously filed an application for an automatic accounting method change could then enter into a PFA on an issue that related to the accounting method change, such as the amount of the section 481 adjustment, or details of the implementation of the change in method of accounting. However, it was clear that a taxpayer who received approval for a non-automatic accounting method change could then enter into a PFA. The IRS has clarified that the PFA procedures are equally available for both automatic and non-automatic accounting method changes.

Despite all the benefits of entering into PFAs, they have historically been underused. Since 2000, the IRS has only received an average of 33 pre-filing agreement requests per year, two-thirds of which were accepted into the program. Additionally, the IRS has on average closed out just under seventeen PFAs a year. This low volume has likely been due to a lack of understanding regarding the availability and benefits of the program, as well as the cost of obtaining a PFA, which may be too high for many taxpayers.

Despite the cost burden, the new procedures dramatically increase the user fee associated with obtaining a PFA. The filing fees are as follows:

Date Filed Cost
Before June 2, 2016 $50,000
Between June 2, 2016 and
December 31, 2016
$134,300
After December 31, 2016 $218,600

Taxpayers should not be surprised to see significant fee increases in other IRS ruling requests and services. Historically, the IRS has charged a user fee that recovers less than the full cost of service. However, in light of prevailing IRS resource constraints, this policy is likely to change.

Updated List of Automatic Changes:

In January 2015, the IRS and Treasury released Rev. Proc. 2015-13, which provides new comprehensive accounting method change procedures for both automatic and non-automatic accounting method changes. While Rev. Proc. 2015-13 contains the latest method change procedures, the comprehensive list of available automatic accounting method changes was published in a separate procedure, Rev. Proc. 2015-14, making it easier for the IRS and Treasury to update the list.

On May 5th, the IRS replaced Rev. Proc. 2015-14 with Rev. Proc. 2016-29, providing a new, comprehensive list of automatic accounting method changes. Rev. Proc. 2016-29 provides three new changes, removes the long-term contract change under Section 460, removes several obsolete changes, and modifies quite a number of other changes. The new changes include the treatment of section 195 start-up expenditures, the treatment of interest capitalization under section 263A, and the application of the retail inventory method under section 471. Rev. Proc. 2016-29 is generally effective for all automatic Forms 3115 filed on or after May 5, 2016, for a year of change ending on or after Sept. 20, 2015.

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Dwight N. Mersereau
Partner – Washington, D.C.
Phone: +1 202.624.2856
Email: dmersereau@crowell.com
Neville R. Jiang
Associate – Washington, D.C.
Phone: +1 202.624.2527
Email: njiang@crowell.com