Discussion:Missed Form 3115 deadline

We are trying to determine the appropriate course of action now. If we were to go back and amend all the previous returns, we would be going beyond the 3 years for which a return can be amended. If we did decide to do this, we fear we would be opening up the tax return to further scrutiny by the IRS for more issues than just this one. We are considering taking the entire adjustment on the 9/30/06 tax return, which hasn't been filed yet, but without a Form 3115.

Does anyone have any guidance they can give me as to how to proceed? I've tried contacting the IRS twice about this and they are useless.

$5 million is not a large corp for IRS, and under the union contract it requires an examiner grade level IRS don't got much of (worse since the massive functional reorg by IRS in mid-90's, the most significant in history of IRS). If the return were to hit the DIF system, it would evidence the method change with no required attachments. Why did t/p do this and not file a 3115? About the only question. Is there something in future t/p knows will happen which will make this treatment cheaper in the long run? Just wake up that asleep GS-12 over there with little to do. :-). IOW, with limited staffing at that grade level, there's plenty other clearer, tax-deficiency cases to work than this one.

If the return were examined, and no issue raised, that means your new method has been accepted! You saved the 3115 user fee too. Such a deal! [with appropriate Yiddish inflection :-)]

Another out is to wait another year and do 3115. I know it's uncomfortable to sign an 1120 w/o doing every last thing right we're expected to know (40-page 3115 Rev Procs!). But if the year it should have been done is examined, IRS then got the problem in forcing all the tax in one year, on a method change headquarters approved effective one year later. What sense does that make? A minor timing issue on a small corp.

Most practitioners can easily miss how complex 3115 Rev Proc procedures are really targeted toward bigger corps. Even Fortune 500, both because they are almost 100% audited but timing issues and technical 3115 matters add to audit time IRS just hates, but also because IRS audits them years behind. And then there's the corps in-between, like $75 million assets, much more in receipts, but not audited that much. But look at the 1120 tax dispersion tables by size, and it's really illuminating. Treasury (vs. IRS) cares about accounting methods because they care about the budget deficit. Current quarterly 1120-ES receipts matter, and such positive announcements as a harbinger affect world-wide financial markets! The DOW goes up followed by other indicators, unemployment goes down, best in an election year.

I really dunno, but I'll wager that when IRS administratively sets like $5 million threshold for matters like this, it's simply deciding that around there, an 1120 should have a tax pro who's at least 80% good. Leastwise, I've been in the [not that big a place, a $13 trillion economy completely aside] at 1100 Constitution Ave. NW, and there's a shop there charged with dealing with tax policy matters and coordinating with Treasury. But I doubt they have the staffing or the analytical tools to evaluate the revenue impact. On balance, they seem to do the job. How about $10 million threshold? Naw, too big. ;-)

"I've tried contacting the IRS twice about this and they are useless."

Ouch, that hurts! But think about how complex tax fed tax things now are. But even beyond the complexity of tax law and IRS procedure today, the cost to give a telephone assister wisdom to whom you may be referred for real technical question in a training course costs enormous money. Not so much direct costs, but lost opportunity costs where my having been detailed to 1100 Constitution to write IRS training material. BTDT, but my salary/travel costs, relative peanuts, but the effect of a Revenue Agent I supervise back home to backfill me and who'd otherwise be examining a $100 million asset company at $2,000/hour tax deficiency yield. Plus, the testimony of the IRS Commissioner before a Congressional Committee to deliver results where Congress previously budgeted the enforcement money. Thus, IRS training of toll-free expertise re arcane 3115 answers among a thousand other technical things simply won't happen.

The positive side of all this is that IRS greatly depends upon, not so much the national store-fronts, though on balance helps, the knowledge of tax professionals on larger $$ returns serving a complex client on arcane matters brings in revenue. I can assure the orig poster that if I were posed the knowledgeable question in the orig post, it would not be the norm, I think I know what I would tell you, and hardly my worst day in advice. And unlike toll-free, my phone-conversation with you is not monitored. Nor if I made you happy would I be so disingenuous with my boss to broadcast such a routine matter for my evaluation. My objectives in the Performance Management Recognition System (a/k/a bonus) -- achieving real $$ enforcement results were otherwise. The way IRS actually tries to manage itself. IRS, an organization of near 100,000, a very tiny fraction work-a-day folk engaged in really technical matters, simply cannot manage itself like tax pros (much less t/p's) would want -- t/p filings around 150 million one obvious problem. It just costs too much. Guess who gets the blowback, the good tax pros. The way IRS wants it. File and forget, if in best judgment, is one piece of advice.

Excuse the length of this; the real IRS. Anecdotal exceptions in IRS enforcement certainly happen, but not the rule. 3115 issues leastwise.

I would not follow TxSrv's advice because the earlier years are open and you may be liable for the penalty for disregarding rules and regulations already. Why make it worse with an unauthorized method change?

Assuming the change would have qualified for an automatic change under Appendix section 5.01 of Rev Proc 2002-9 in the earliest open year, why not pay the $2500 to request relief under Reg. 301.9100-3 to make the late election in the earliest open year and amend the intervening years. Getting relief may be problematic, but, assuming the 481(a) adjustment is positive and they relied on your firm, you might be able to get relief.

That part I don't agree with. This is a small corp; small timing tax. Where's the necessary understatement of tax under which reasonable scenario? Have you ever tried to apply a 6694 penalty while working for the IRS? Do you know how that statute was tightened to prevent frivolous application by IRS? Do you know how administratively difficult application of that penalty is on a one-shot, technical situation is for the IRS -- even before the statute was was tightened? Do you know any preparer who has had such a penalty applied? Do you seriously think a 6662 penalty could be applied to the t/p in such a case? The IRS now has the full burden of proof as to that penalty. So where's the malpractice?

Are you also suggesting that they probably will never take a look at this return because it is small potatoes?

Returns cannot be effectively screened for audit (from the small % which hit the screening systems) for accounting methods. E.g., t/p files beg and end inventory of a clearly estimated $24,000 inventory. What's the audit potential of that? Buehler...anyone? Similarly, IRS cannot see the the effect of cash to accrual, or whether t/p would have the records to easily compute accrual, or would cooperate at all in the matter. If not, it would have to be no-changed. Actually, there usually would be a way to a negotiate the matter by picking up current year and allowing t/p to estimate the accrual balance sheet items if too complicated to reconstruct.

You can file the 3115 two years from now, and I can't see why (on an automatic change item) they would send the thing to the field for audit. The goal is voluntary compliance, better late than never on a small entity. Field doesn't want kind of work.

I would look to tax effect of the 481(a) amt in one year, verses projected 4 years forward. If same marginal tax rate, then the difference is interest. Compare to the billing cost of a 3115.