31 March 2017 IRS Notice 2017-17 invites comments on tax implications of the new financial accounting revenue recognition standards and a proposed automatic tax accounting method change revenue procedure In Notice 2017-17 (released March 28, 2017), the IRS invited additional comments on the effects of, and the possible tax accounting method change procedures to respond to, the new financial accounting revenue recognition standards. The IRS provided a proposed revenue procedure as draft guidance to allow taxpayers an automatic tax accounting method change for recognizing income for tax purposes when the change is made in the tax year concurrent with the taxpayer's adoption of the new financial accounting revenue recognition standards, and the change is made as a result of, or directly related to, the adoption of the new financial accounting revenue recognition standards. On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) jointly announced new financial accounting standards for recognizing revenue, titled "Revenue from Contracts with Customers."1 While the new financial accounting standards are considered a significant change from current financial accounting standards, the tax income recognition accounting methods rules and authorities currently remain unchanged. Generally, under Section 451 and related regulations and authorities, a taxpayer must recognize income for tax purposes under the "all events" test when: (i) it has a fixed right to receive the income; and (ii) the amount can be determined with reasonable accuracy. Such guidance is found in Section 451 and related Treasury regulations. Under present IRS procedures, a taxpayer must obtain consent from the IRS Commissioner to change a tax accounting method by filing IRS Form 3115, Application for Change in Accounting Method. The general procedures require taxpayers to submit a request for change to the IRS National Office with detailed information about the item of change, the present method of accounting, the proposed method of accounting, and the tax authorities supporting such change. 2 To alleviate the burden on the IRS and taxpayers to make common method changes, the IRS has developed a list of "automatic" method changes whereby the taxpayer is deemed to have the consent of the IRS to change its accounting method if the taxpayer is within the scope of a revenue procedure and any related guidance for the specific method change.3 On June 15, 2015, the IRS requested comments in Notice 2015-40 on the effect of the new financial accounting revenue recognition standards on taxpayers' methods of tax accounting. While certain organizations and entities published responses to this request, the IRS acknowledged (in Notice 2017-17) that "very few responses were received." The goal of Notice 2017-17 ("the Notice" unless otherwise noted) can be summarized as follows. The IRS invites comments on: — Possible procedures for obtaining IRS consent to a "qualifying same-year method change" (defined later), including the draft automatic method change revenue procedure — Issues of conformity between the new standard and the Internal Revenue Code and Treasury regulations. The Notice provides a draft proposed revenue procedure to provide taxpayers with guidance for income recognition method changes arising from the new standard. If issued, the revenue procedure would provide an automatic method change when the taxpayer adopts the new financial accounting standards and if the change is made "as a result of, or directly related to" (undefined), the adoption of the new financial accounting standards (a so-called qualifying same-year method change). Highlights of the draft proposed revenue procedure include the following: — Any qualifying same-year method changes to comply with Section 451 would be implemented as an automatic method change — A taxpayer must attach to the Form 3115 a brief description of the change and why the change satisfies the applicable income tax provision or guidance — A Section 481(a) adjustment (to reconcile the life to date revenue recognized under the present method vs. the proposed method) must be computed unless the taxpayer has less than $10 million in assets or annual gross receipts (such small taxpayers would effectuate the change on a cut-off basis). In addition to inviting comments on this proposed revenue procedure, the IRS also invites comments from taxpayers on the ramifications and implications to tax reporting of the new financial accounting standards, especially on issues of conformity between the new financial accounting standards and the existing Internal Revenue Code and attendant Treasury regulations. The following are several specific questions posed in the Notice: — To what extent would using the new standards for federal income tax purposes result in acceleration or deferral of income under Section 451 or other income provisions of the Code? — What industry and/or transaction-specific issues might arise as a result of the new standards that may need to be addressed in future guidance? — In what situations should the IRS allow taxpayers adopting the new standards to follow their book method of accounting for tax purposes (for example, when income is always accelerated)? — To what extent do the rules regarding allocation of standalone sales price and transaction price in the new standards affect taxpayers' ability to satisfy their tax obligations? — What related accounting method changes do taxpayers anticipate requesting that may appropriately be made on a single Form 3115? — If multiple changes are requested on a single Form 3115, should the taxpayer report a separate Section 481 adjustment for each change and should those adjustments be netted and a single spread period applied? No broad Section 451 income recognition automatic method change is currently provided to taxpayers; therefore, the issuance of this Notice indicates the IRS's understanding that the new financial accounting standards will have widespread effects. Furthermore, the possibility of an automatic method change resulting from the new standard could provide relief from the burden of advance consent method changes and from complications that could arise from the income tax accounting implications of present and proposed tax income recognition methods. The Notice indicates the IRS seeks feedback on the widespread implications of the new financial accounting standards. As entities implement them for financial accounting reporting, the resulting effects to comply with such changes are surfacing. Consequently, many tax departments are now assessing the variety of implications of the standard for tax accounting methods, earnings and profits, state and local taxes, transfer pricing, etc. — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting 1 See FASB Update No. 2014-09 and IASB International Financial Reporting Standard (IFRS) 15. See also, FASB Update No. 2015-14, "Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date." Document ID: 2017-0570 |
