The IRS has addressed how taxpayers will gain permission to change their methods of accounting to comply with changes made by Congress in the Tax Cuts and Jobs Act to IRC §451 (found at IRC §451(b)) that require a taxpayer with an “applicable financial statement” (AFS) who is recognizing revenue for tax purposes under the accrual basis using the all events test to treat the test as satisfied no later than when revenue is recognized in the AFS.  The guidance is found in Revenue Procedure 2018-60.

The procedure adds a new automatic accounting method change procedure to Section 16 of Revenue Procedure 2018-31.  The Revenue Procedure provides the change applies to a taxpayer that:

(a) wants to change to a method of accounting that treats an item of gross income, or portion thereof, as meeting the all events test no later than when such item, or portion thereof, is taken into account as revenue in its AFS under § 451(b)(1)(A), and/or

(b) is not adopting the New Standards (as defined in section 16.11(1) of this revenue procedure) for the year of change, and wants to allocate the transaction price to performance obligations under § 451(b)(4).

The “New Standards” referred to in (b) generally refer to ASC 606 as adopted by FASB.  The description referred to was found in Revenue Procedure 2018-29, Section 3.01 and provides:

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly announced new financial accounting standards for revenue recognition entitled “Revenue from Contracts with Customers (Topic 606)” (New Standards). See FASB Update No. 2014-09, and IASB International Financial Reporting Standard (IFRS) 15. Under the New Standards, a taxpayer generally recognizes revenue for financial accounting purposes when the taxpayer satisfies a performance obligation by transferring a promised good or service to a customer, as described in the New Standards.

The §451(b) automatic change of Revenue Procedure 2018-60 does not apply to:

(a) wants to make a change for federal income tax purposes to a method that adopts the New Standards, as provided in section 16.11 of this revenue procedure. See, however, section 16.11 of this revenue procedure for a change to adopt the New (Standards)

(b) wants to make a change in method of accounting to a method described in §451(b)(2); or

(c) does not have an AFS, as defined in § 451(b)(1)(A)(i) or (ii).

The limitation in (a) has confused some readers.  However, it is merely holding that if a taxpayer wants to fully adopt the “New Standards” (ASC 606) for recognizing revenue, that change must be made via the methods provided in the previously released Revenue Procedure 2018-29.

Example

Crisis Systems, Inc. has previously reported revenue at the same time for both financial accounting and tax purposes.  Crisis Systems, Inc. has determined that the adoption of ASC 606 will significantly change the timing of revenue recognition for GAAP purposes, accelerating recognition in some cases but slowing recognition in others.  The company does not want to be keeping track of different revenue recognition dates and has concluded that the revenue recognition changes imposed by ASC 606 would be allowable recognition rules for tax purposes.

Crisis Systems cannot use Revenue Procedure 2018-60’s procedures to obtain automatic consent of the Commissioner to adopt this change since it is looking to do more than simply conform to ASC 606 when revenue would be recognized earlier than under the prior GAAP rules.  Rather, Crisis Systems looks to the automatic methods found in Revenue Procedure 2018-29 in order to obtain automatic permission to make its requested change. 

Since Crisis will be recognizing revenue at the same time in its AFS and on its tax return, the change provided for in Revenue Procedure 2018-60 is not applicable.

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The procedure also does not apply if the taxpayer wishes to adopt the method of reporting advanced payments found in IRC §451(b)(2).  Nor does it apply if a taxpayer does not have an AFS.

Revenue Procedure 2018-60 allows some taxpayers making the conformity change under the procedure to elect not to file a Form 3115.  Taxpayers that can make the adjustment without filing a Form 3115 are:

(A) the taxpayer, other than a tax shelter (as defined in § 448(d)(3)), meets the § 448(c) gross receipts test (a “small business taxpayer”). The taxpayer meets the §448(c) gross receipts test if the taxpayer has average annual gross receipts for the three prior taxable years of $25,000,000 or less; or

(B) the taxpayer is making one or more changes to comply with §451(b)(1)(A) and/or § 451(b)(4), and the § 481(a) adjustment required by each of the changes is zero. A taxpayer making more than one change in method of accounting under section 16.12(2) of this revenue procedure is not permitted to net the § 481(a) adjustments to determine if the taxpayer meets the requirements to use the streamlined method change procedures.

However, a taxpayer that also wishes to concurrently change to conforming to ASC 606 fully for some or all revenue items will be required to use Form 3115 to request both changes.

If a taxpayer decides to take the IRS up on not having to file the Form 3115, there will not be audit protection for prior years.

A taxpayer required to file, or who decides to file, a Form 3115 for the 451(b) conformity change fills in the following portions of the Form 3115:

(i) The identification section of page 1 (above Part I);

(ii) The signature section at the bottom of page 1;

(iii) Part I;

(iv) Part II, all lines except lines 13,16c, and 19; and

(v) Part IV, all lines. For a taxpayer making a change under this section 16.12, the statement required for Line 26 of Form 3115 should list the § 481(a) adjustment(s), and a description of where the § 481(a) adjustment is reflected on the federal income tax return (line number or schedule).

The requirement to file a duplicate copy of Form 3115 is also waived for this change.

A taxpayer making concurrent changes in the method of accounting under this change can file a single Form 3115, but must attach a separate computation for each §481(a) adjustment.