15 September 2019 New Revenue Procedure 2019-37 includes updated automatic method changes for complying with IRC Section 451 income recognition requirements In Revenue Procedure 2019-37 (released September 6, 2019), the IRS provides updated guidance for complying with IRC Section 451 and its proposed regulations. Revenue Procedure 2019-37 adds new automatic method changes and modifies certain existing method changes related to income recognition, generally provided in Section 16 of Revenue Procedure 2018-31 (taxable year of inclusion IRC Section 451)). An overview of the new or modified automatic income recognition method changes follows, and each designated change is summarized in the attached table.
Section 16.11 provides automatic method change procedures for taxpayers to change their income recognition method for tax purposes to a method that uses the New Standards to identify performance obligations, allocate transaction price to performance obligations, and/or consider performance obligations satisfied so long as the proposed method of accounting is otherwise permissible for tax purposes (e.g., comply with IRC Section 451(b)). This automatic method change is only available for taxpayers in the year the taxpayer adopts the New Standards. Taxpayers may implement this method change with an IRC Section 481(a) adjustment or on a cut-off basis. Additionally, to assist with broader tax income recognition compliance efforts, taxpayers may file this change concurrently on the same Form 3115 as a change under Section 16.12 of Revenue Procedure 2018-31 (i.e. an IRC Section 451 change, described later) and the "five-year eligibility rule" of Revenue Procedure 2015-13 is waived. Revenue Procedure 2019-37 did not impact the scope of DCN 231. Taxpayers that file a method change under DCN 231 typically need to consider concurrent, or future filings, to comply with the new IRC Section 451 rules, adopt or change methods for advance payments, or optionally adopt the proposed IRC Section 451 regulations.
The IRC Section 451(b) TCJA Compliance change in Section 16.12 provides automatic method change procedures for accrual-method taxpayers with an applicable financial statement (AFS) to (i) change their method of accounting for the recognition of income to a method that complies with IRC Section 451(b)(1)(A); or (ii) change their method of allocating the transaction price to comply with IRC Section 451(b)(4) (in a tax year other than the year of ASC 606 adoption). Section 16.12 includes detailed procedural rules, including rules addressing requirements for a "short Form 3115," the availability of a "streamlined" procedure for certain taxpayers, filing concurrent method changes, and a waiver of certain eligibility requirements in Revenue Procedure 2015-13. See Tax Alert 2018-2423 for more information. Revenue Procedure 2019-37 modified the change to comply with IRC Section 451(b)(1)(A) to give taxpayers an option to implement the method change with either an IRC Section 481(a) adjustment or on a cut-off basis, provided taxpayers make a concurrent change under Section 16.11 (DCN 231).
Revenue Procedure 2019-37 added new automatic method changes to Section 16.12 of Revenue Procedure 2018-31 to comply with the proposed regulations under Sections 1.451-3 and 1.451-8 (DCN 242). Prop. Reg. Section 1.451-3 provides guidance on the general rule for the tax year of income inclusion under an accrual method of accounting (REG-104870-18). Prop. Reg. Section 1.451-8(c) provides guidance on the deferral method for taxpayers with an AFS; Prop. Reg. Section 1.451-8(d) provides guidance on the deferral method for taxpayers without an AFS (REG-104554-18). Like the other changes under Section 16.12, there are detailed procedural rules and options for filing a method change to adopt the IRC Section 451 proposed regulations, including streamlined method change procedures for certain taxpayers and the option to implement certain changes on a cut-off basis. Additionally, taxpayers under exam that wish to make a change to comply with Prop. Reg. Sections 1.451-3 and 1.451-8(c) receive a waiver of the limitations on audit protection for the taxpayer's first, second or third tax year beginning after December 31, 2017 (December 31, 2018, for a change related to income from a specified credit card fee). A change in method of accounting under DCN 242 requires a taxpayer to adopt the respective proposed regulations in full (under Sections 1.451-3 and/or 1.451-8). Taxpayers should carefully consider whether filing changes in method of accounting to comply with the proposed regulations is a favorable option, as alternative automatic method changes to implement similar proposed methods are available (e.g., DCNs 239, 83/84).
Taxpayers with deferred revenue for financial statement purposes have relied on the provisions of Revenue Procedure 2004-34 for the tax treatment of advance payments for many years. The automatic method change provisions for Revenue Procedure 2004-34 are found in Section 16.07 of the automatic method change procedures, and taxpayers may continue to rely on these provisions until the final regulations under Section 1.451-8 for the treatment of advance payments are released. Specifically, DCN 83 provides procedures for a change to the full inclusion method, and DCN 84 provides procedures for a change to the deferral method for advance payments. Revenue Procedure 2019-37 did not impact the automatic method changes to follow a method under Revenue Procedure 2004-34 for advance payments. Taxpayers with new, or changing treatment of, advance payments should confirm the appropriate method changes are made to properly treat advance payments. Additionally, taxpayers should assess whether filing concurrent changes in method of accounting is necessary, if changes for tax purposes resulted from changes to the allocation or timing of revenue recognition for financial reporting purposes.
Section 16.10 historically provided a narrow automatic method change (DCN 153) for a taxpayer that currently uses the deferral method provided in Revenue Procedure 2004-34, changes the manner of recognition of advance payments in its AFS, and changes in the amount deferred under its deferral tax method. This method change is implemented on a cut-off basis and is made via a statement attached to the taxpayer's return in lieu of a Form 3115. The "five-year eligibility rule" of Revenue Procedure 2015-13 does not apply, but taxpayers do not receive audit protection for this change. Revenue Procedure 2019-37 modifies Section 16.10 to expand the scope of DCN 153 to any change in how a taxpayer recognizes an item, or portion thereof, as revenue in its AFS (not just those related to advance payments). Changes related to advance payments continue to be made on a cut-off basis, but changes for other items of income require an IRC Section 481(a) adjustment. A taxpayer may make more than one change under Section 16.10 on the same statement in lieu of a Form 3115 for the same year of change. As taxpayers continue to review their methods of revenue recognition for financial reporting under the New Standards, there may be frequent modifications to how revenue is recognized in the AFS. DCN 153 requires taxpayers to make a change in accounting method for any change in how revenue is recognized in the AFS, which will likely impact ongoing compliance for the 2019 tax year and future tax years. The guidance is generally effective for tax years beginning after December 31, 2017. For specified credit card fees, the guidance is effective for tax years beginning after December 31, 2018. Taxpayers that have filed accounting method changes for 2018 tax years, for the following methods, are generally not required to take any additional action: However, taxpayers should assess the potential effects of the recently released guidance on previous/proposed filings and assess whether new, alternative methods are preferable.
Document ID: 2019-1631 | |||||||||||
