SECTION 1. PURPOSE

.01 In general. This revenue procedure provides the procedures under § 446(b) of the Internal Revenue Code and § 1.4461(b) of the Income Tax Regulations for changes in method of accounting initiated by the Internal Revenue Service. This revenue procedure also provides the procedures that the Service will use for timing issues raised and resolved by the Service on a nonaccounting-method-change basis.

.02 Voluntary compliance. This revenue procedure provides terms and conditions for Service-initiated changes that are intended to encourage taxpayers to voluntarily request a change from an impermissible method of accounting prior to being contacted for examination. Under this approach, a taxpayer that is contacted for examination and required to change its method of accounting by the Service generally receives less favorable terms and conditions (for example, an earlier year of

change and a shorter § 481(a) adjustment period for a positive adjustment) than if the taxpayer had filed its request to change before the taxpayer was contacted for examination. See Rev. Proc. 97–27, 1997–1 C.B. 680, and Rev. Proc. 97–37, 1997–33 I.R.B. 18, which provide the procedures for voluntary requests to change an accounting method.

.03 Procedures for Examination, Ap- peals, and counsel for the government for resolving timing issues. This revenue

June 1, 1998 12 1998–22 I.R.B.

420 F.2d 352 (1st Cir. 1970); Standard Paving Company v. Commissioner, 190 F.2d 330 (10th Cir.), cert. denied, 342 U.S. 860 (1951).

(4) The Commissioner has the discretion to change a taxpayer’s method of accounting even though the Commissioner previously changed the taxpayer to the method if the Commissioner determines that the method of accounting does not clearly reflect the taxpayer’s income. The Commissioner is not precluded from correcting mistakes of law in determining a taxpayer’s tax liability, including the power to retroactively correct rulings or other determinations on which the taxpayer may have relied. See Dixon v. United States, 381 U.S. 68 (1965); Auto- mobile Club of Michigan v. Commis- sioner, 353 U.S. 180 (1957); Massaglia v. Commissioner, 286 F.2d 258 (10th Cir. 1961). (5) The Commissioner does not have discretion, however, to require a taxpayer to change from a method of accounting that clearly reflects income to a method that, in the Commissioner’s view, more clearly reflects income. See Capitol Fed- eral Savings & Loan v. Commissioner, 96 T.C. 204 (1991); W.P. Garth v. Commis- sioner, 56 T.C. 610 (1971), acq., 1975-1 C.B. 1.

(6) The Commissioner may change the accounting method of a taxpayer that is under examination, before an appeals office, or before a federal court, except as otherwise provided in published guidance. See, for example, section 9 of Rev. Proc. 97–27, which generally precludes the Service from changing a taxpayer’s method of accounting for an item for prior taxable years if the taxpayer timely files a Form 3115 pursuant to Rev. Proc. 97–27 requesting to change its method of accounting for the item.

.03 No right to retroactive method change. Although the Commissioner is authorized to consent to a retroactive accounting method change, a taxpayer does not have a right to a retroactive change, regardless of whether the change is from a permissible or impermissible method. See generally, Rev. Rul. 90–38.

.04 Service ordinarily will not initiate a taxpayer favorable method change. Consistent with the policy of encouraging prompt voluntary compliance with proper tax accounting principles, the Service or

procedure sets forth procedures for Examination, Appeals, and counsel for the government to resolve timing issues. It does not alter Examination’s authority to examine the returns of a taxpayer. It provides parameters for Examination to resolve timing issues, but does not limit or expand Examination’s authority to resolve any issues under Delegation Order No. 236, Application of Appeals Settlement to Coordinated Examination Program Taxpayers, or Delegation Order No. 247, Authority of Examination Case Managers to Accept Settlement Offers and Execute Closing Agreements on Industry Specialization Program and International Field Assistance Program Issues. This revenue procedure does not alter the authority of Appeals or counsel for the government to resolve or settle any issues.