As the landscape of tax compliance constantly evolves, GHJ’s Corporate Tax Practice keeps businesses informed on crucial updates, including the IRS's tightening of restrictions on automatic accounting method change procedures.

The IRS released Revenue Procedure 2024-23 on April 30, which tightened restrictions under Rev. Proc. 2015-13. Previously, taxpayers could adopt certain accounting methods without needing IRS approval under Rev. Proc. 2023-24.

Rev. Proc. 2024-23 lists 21 adjustments to the list of automatic method change procedures under Rev. Proc. 2023-24. Some notable examples include:

1. Revenue Recognition Timing: Adjustments to the timing of recognizing revenue now require formal IRS approval, which affects when businesses can record income on their tax returns.
2. Cost Capitalization Methods: For inventory or self-constructed property, a change from the direct reallocation method or the step allocation method now requires formal IRS approval.
3. Mixed Service Cost Allocation: Taxpayers now require formal IRS approval when using the direct allocation method. With this change, they must make an election or revoke an election to use the 90-10 de minimis rule that involves reallocating a mixed service department’s costs to production or resale activities.

IMPACT ON REVENUE RECOGNITION

The all-events test requires that all conditions for income recognition be met before reporting income. The applicable financial statement (AFS) income inclusion rule ensures income cannot be recognized for tax purposes later than in financial statements. While automatic consent for changes to comply with the AFS income inclusion rule was set to expire in 2023, the IRS has now narrowed the scope of automatic changes to exclude adjustments to the general all-events test.

This retroactive change burdens companies trying to comply with the final Section 451 regulations for revenue recognition. Many taxpayers believed they could correct revenue recognition issues under the automatic procedures but will now need to use the non-automatic process.

WHAT TAXPAYERS NEED TO KNOW

Taxpayers wanting to implement these changes must now obtain formal IRS consent through non-automatic change procedures. This involves filing Form 3115, Application for Change in Accounting Method, by the year-end of the desired change and paying a user fee. Although the IRS generally approves changes to permissible methods, there is no guarantee of consent, and the criteria for approval are unclear.

This change is significant for taxpayers aiming to manage income and attributes through tax planning. With more accounting method changes requiring IRS consent, taxpayers must reassess their strategies with their tax advisors.

EFFECTIVE DATE

Rev. Proc. 2024-23 is effective for Forms 3115 filed on or after April 30, 2024, for a year of change ending on or after Sept. 30, 2023.

KEY TAKEAWAYS

• Significant Changes: Rev. Proc. 2024-23 makes significant adjustments to the list of automatic method changes.
• Non-Automatic Changes: These require filing Form 3115 by the year-end of the desired change and a user fee, whereas automatic changes can be filed by the due date (or extended due date) of the tax return.
• Uncertain Approval: IRS consent is not guaranteed and the approval criteria are unclear.
• Potential Delays and Complexities: Taxpayers should consider the potential delays and complexities associated with the non-automatic process.

GHJ will continue to monitor developments and provide updates as more information becomes available. Please contact GHJ’s Corporate Tax Practice to learn more about these changes and how businesses should reassess their tax planning strategies.