IRS Releases Accounting Method Guidance for Section 451 Compliance

Following the release of anticipated proposed regulations for Section 451(b) and Section 451(c), the Internal Revenue Service (IRS) released Revenue Procedure 2019-37, which provides updated guidance for compliance with Section 451 and its proposed regulations. This guidance is generally effective for taxable years beginning after Dec. 31, 2017.

Highlights of the Guidance

Revenue Procedure 2019-37 seeks to modify Revenue Procedure 2018-31 in the following areas:

  • For taxpayers who are not adopting the GAAP New Standards and wish to treat an item of gross income as meeting the all events test no later than when such items are taken into account as revenue in the AFS, a new automatic change allows such taxpayers to request consent to change their accounting method for revenue recognition to comply with Section 451(b) (1)(A) and proposed regulation Sections 1.451-3 or 1.451-8.
  • A taxpayer with an AFS may make the above changes with a Section 481(a) adjustment or on a cut-off basis.
  • A new automatic change also allows for a taxpayer without an AFS to defer advance payments based on when the payment is earned.
  • Taxpayers have the option to implement certain changes following streamlined procedures, making a change without filing a Form 3115 – Application for Change in Accounting Method – to implement compliance with Section 451. However, a change made using the simplified procedures does not receive audit protection, and the Section 481(a) adjustment must be zero, which is different from a change made on a cut-off basis.
  • The revenue procedure states that any nonautomatic Form 3115 applications requesting a change in accounting method that are also impacted by Revenue Procedure 2019-37 will be returned if filed on or before Sept. 9, 2019.

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