SECTION 7. PROCEDURES FOR A

SERVICE-IMPOSED ACCOUNTING METHOD CHANGE.

.01 Requirement to Provide Notice to Taxpayer .

(1) In general . An examining agent, appeals officer, or counsel for the government changing a taxpayer’s method of accounting will provide notice that an accounting method issue is being treated as an accounting method change. However, an appeals officer or counsel for the government resolving an accounting method issue as an accounting method change is not required to provide notice that the accounting method issue is being treated as an accounting method change if such notice has been provided by the examining agent. In addition, if the examining agent has provided notice that an accounting method issue is being treated as an accounting method change and an appeals officer or counsel for the government subsequently resolves such accounting method issue on a nonaccountingmethod-change basis, the appeals officer or counsel for the government should provide notice that the accounting method issue has not been treated as an accounting method change.

(2) Form of notice . The notice must be in writing. If the taxpayer and the Service execute a closing agreement finalizing the change, the notice will be provided in the closing agreement. If the taxpayer and the Service do not execute a closing agreement, the notice ordinarily will be provided in the examiner’s report or the Form 870AD (Offer of Waiver of Restriction on Assessment and Collection of Deficiency in Tax and of Acceptance of Overpayment). However, the Service may also provide the notice in a preliminary notice of deficiency, a statutory notice of deficiency, a notice of claim disallowance, a notice of final administrative adjustment, a pleading (for example, a

petition, complaint, or answer) or amendment thereto, or in any other similar writing provided to the taxpayer.

(3) Content of notice . The notice must include:

(a) a statement that the accounting method issue is being treated as an accounting method change or a clearly labeled § 481(a) adjustment; and

(b) a description of the new method of accounting.

(4) Method not established without notice . The resolution of an accounting method issue will not establish a new method of accounting if the Service does not provide the notice required by section 7.01 of this revenue procedure. See section 9 of this revenue procedure for the procedures applicable if the Service does not provide this notice.

.02 Finalizing a Service-imposed Method Change .

(1) In general . To implement a Service-imposed change in method of accounting, the taxpayer and the Service should execute a closing agreement under § 7121 in which the taxpayer agrees to the change and the terms and conditions of the change. For purposes of this revenue procedure, in the case of accounting method issues before a federal court, the term “closing agreement” includes any other appropriate settlement agreement. If the taxpayer and the Service execute such a closing agreement, then the change is final as of the date of the agreement (unless otherwise provided by a federal court). In the absence of such an agreement, a Service-imposed accounting method change is final only upon the expiration of the period of limitations for filing a claim for refund under § 6511 for the year of change or the date of a final court order requiring the change.

(2) Content of closing agreement . A closing agreement finalizing a Serviceimposed accounting method change must comply with the requirements of Rev. Proc. 68–16 (1968–1 C.B. 770), and should include the information outlined in the Model Closing Agreement for Settlement on an Accounting Method Basis attached as APPENDIX A of this revenue procedure. A settlement agreement finalizing a Service-imposed accounting method change with respect to an accounting method issue that is pending before a federal court must conform to

April 1, 2002 685 2002-13 I.R.B.

file a “qualified amended return” under Rev. Proc. 94–69 (1994–2 C.B. 804) may satisfy any requirement to file an amended return by filing a “qualified amended return” in accordance with that revenue procedure.

(3) Future years . The taxpayer must use the new method of accounting on all returns filed after the date that a Serviceimposed accounting method change becomes final ( see section 7.02 of this revenue procedure), unless the taxpayer obtains the consent of the Commissioner to change from the new method or the Service changes the taxpayer from the new method on subsequent examination. A taxpayer that files a return using the new method prior to the date a Serviceimposed change becomes final must continue to use the new method on all subsequent returns, unless the taxpayer obtains the consent of the Commissioner to change from the new method or the Service changes the taxpayer from the new method on subsequent examination. If the taxpayer does not use the new method on any return filed prior to the date a Service-imposed change becomes final, and does not file amended returns to reflect the change, the Service should make the adjustments necessary to reflect the change for the affected taxable years if and when it examines those returns.

.04 Effect of Final Service-imposed Method Change .

(1) New method established . A Service-imposed change that is final establishes a new method of accounting within the meaning of § 446(e) and § 1.446–1(e). As a result, the taxpayer is required to use the new method of accounting for the year of change and for all subsequent taxable years, unless the taxpayer obtains the consent of the Commissioner to change from the new method or the Service changes the taxpayer from the new method on subsequent examination.

(2) Subsequent examination . Except as provided in section 7.04(3) of this revenue procedure, the Service is not precluded from changing the taxpayer from the new method of accounting if the Service determines that the new method does not clearly reflect the taxpayer’s income.

(3) Audit protection .

(a) In general . A taxpayer that executes a closing agreement finalizing a

Service-imposed accounting method change will not be required to change or modify the new method for any taxable year for which a federal income tax return has been filed as of the date of the closing agreement, provided that:

(i) the taxpayer has complied with all the applicable provisions of the closing agreement;

(ii) there has been no taxpayer fraud, malfeasance, or misrepresentation of a material fact;

(iii) there has been no change in the material facts on which the closing agreement was based; and

(iv) there has been no change in the applicable law on which the closing agreement was based.

(b) Limitations . The Service may require the taxpayer to change or modify the new method in the earliest open taxable year if the taxpayer fails to comply with the applicable provisions of the agreement or upon a showing of the taxpayer’s fraud, malfeasance, or misrepresentation of a material fact. The Service may require the taxpayer to change or modify the new method in the earliest open taxable year in which the material facts have changed. The Service also may require the taxpayer to change or modify the new method in the earliest open taxable year in which the applicable law has changed. For this purpose, a change in the applicable law includes: (i) the enactment of legislation; (ii) a decision of the United States Supreme Court; (iii) the issuance of temporary or final regulations; or (iv) the issuance of a revenue ruling, revenue procedure, notice, or other guidance published in the Internal Revenue Bulletin.

.05 Coordination with Examination . An appeals officer or counsel for the government changing a taxpayer’s method of accounting will coordinate the resolution with Examination if the appeals officer or counsel for the government proposes to defer the year of change to any taxable year not before appeals or a federal court. Examination will advise the appeals officer or counsel for the government of any changes in material fact in any taxable year under examination.

.06 Deemed Cut-off Method . If the Service does not impose a § 481(a) adjustment but otherwise provides the notice required by section 7.01 of this revenue procedure, the Service-imposed

change will be treated as being made using a cut-off method, unless the Service and the taxpayer specifically have agreed in writing to compromise the amount of the § 481(a) adjustment.