Accounting Methods, Changes in

This article concerns information regarding changes in accounting methods. An accounting method is a set of rules used to determine when and how income and expenses are reported. The term “accounting method” includes not only the overall method of accounting you use, but also the accounting treatment you use for any item.

When you file your first tax return, you must choose a method of accounting. The method you choose must clearly reflect income and must be used consistently from year to year. If, after filing your first return, you want to change to another accounting method, you must first get the consent of the IRS. (You must get prior IRS consent whether your current method is a permissible or an impermissible method.) This is necessary to notify the IRS of the change and to prevent you from gaining an unlawful tax advantage. Changes in accounting methods include changes in the overall system of accounting, as well as changes in the treatment of any material item.

Examples of changes in accounting methods that require prior IRS consent include: (1) a change from the accrual to the cash method; (2) a change in the method or basis used to value inventories; or (3) a change in the method of figuring depreciation. On the other hand, however, a correction or a mathematical error, or an adjustment in the useful life of a depreciable asset, are examples of changes that are not accounting method changes and, thus, do not require prior IRS consent.

To request IRS consent, you must file a current Form 3115 (Application for Change in Accounting Method), along with the appropriate fee, during the tax year for which you are requesting the change. You should indicate on Form 3115 whether you would like a conference if the IRS considers an unfavorable response to your request. If you do not make this indication, the IRS will presume that you do not want one.

If your application is filed after the end of the tax year for which you are requesting the change, the IRS will only consider it timely filed under unusual or compelling circumstances.