SECTION 8. AUDIT — Internal Revenue Bulletin 2015-5

FOR TAXABLE YEARS PRIOR TO YEAR OF CHANGE

.01 In general . Except as provided in SECTION 8.02 or under any other guidance published in the IRB, when a taxpayer timely files a Form 3115 under this revenue procedure, the IRS will not require the taxpayer to change its method of accounting for the same item for a taxable year prior to the requested year of change.

.02 Exceptions . SECTION 8.01 does not apply if any exception in SECTIONS 8.02(1) through 8.02(7) applies.

(1) No audit protection for taxpayers under examination . Except as provided in SECTIONS 8.02(1)(a) through (f), the IRS may require the taxpayer to change its method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if the taxpayer is under examination as of the date the taxpayer files the Form 3115.

(a) Change filed in a three-month win- dow .

(i) In general . Except as provided in SECTION 8.02(1)(a)(iii), SECTION 8.02(1) (no audit protection for taxpayers under examination) does not apply to a request for a change in method of accounting for an item filed in a three-month window if (1) the taxpayer has been under examination for at least 12 consecutive months as of the first day of the threemonth window, and (2) the method of accounting for the same item the taxpayer is requesting to change is not an issue under consideration as described in SECTION 3.08 as of the date the taxpayer files the Form 3115.

(ii) Three-month window . A “threemonth window” is the period beginning on the fifteenth day of the seventh month of the taxpayer’s taxable year and ending on the fifteenth day of the tenth month of the taxpayer’s taxable year. However, if the taxable year is a short taxable year that ends before the fifteenth day of the tenth month after the short taxable year begins, the “three-month window” is the period beginning on the first day of the second month preceding the month in which the short taxable year ends and ending on the last day of the short taxable year.

(iii) Certain foreign corporations . In the case of a taxpayer that is a CFC or 10/50 corporation, a three-month window is determined with reference to the CFC or 10/50 corporation’s taxable year and is only available if:

(A) all of the controlling domestic shareholders that are under examination have been under examination for at least 24 consecutive months as of the first day of the three-month window,

(B) as of the date the designated shareholder files the Form 3115, the CFC or 10/50 corporation’s method of accounting for the item to be changed is not an issue under consideration within the meaning of

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SECTION 3.08(4) or has been an issue under consideration within the meaning of SECTION 3.08(4) for at least 24 consecutive months; and

(C) the CFC or 10/50 corporation’s method of accounting for the item to be changed is not an issue under consideration within the meaning of SECTION 3.08(1), 3.08(2), or 3.08(3) as of the date the designated shareholder files the Form 3115. (iv) Statement required . The Form 3115 must include a statement that the Form 3115 is filed under a three-month window in SECTION 8.02(1)(a) of Rev. Proc. 2015–13.

(b) Change filed in a 120-day window . (i) In general . Except as provided in SECTION 8.02(1)(b)(iii), SECTION 8.02(1) (no audit protection for taxpayers under examination) does not apply to a request for a change in method of accounting for an item filed in a 120-day window if the method of accounting for the same item the taxpayer is requesting to change is not an issue under consideration as described in SECTION 3.08 as of the date the taxpayer files the Form 3115. However, the 120-day window ends on the date the IRS notifies the taxpayer that jurisdiction for the case has been transferred from Appeals to the examining agent(s) for reconsideration. See SECTION 3.18(1)(c).

(ii) 120-day window . A “120-day window” is the 120-day period following the date an examination of the taxpayer ends, regardless of whether a subsequent examination has commenced.

(iii) Certain foreign corporations . The 120-day window provisions in SECTION 8.02(1)(b)(i) are not available for a CFC or 10/50 corporation.

(i) In general . SECTION 8.02(1) (no audit protection for taxpayers under examination) does not apply to a change in method of accounting for an item when the present method is not before the director. The present method is not before the director when it is:

(A) a change from a clearly permissible method of accounting; or

(B) a change from an impermissible method of accounting and the impermissible method was adopted subsequent to

the taxable year(s) under examination on the date the taxpayer files the Form 3115.

The question of whether the present method of accounting is a clearly permissible method of accounting or was adopted subsequent to the taxable year(s) under examination may be referred to the national office as a request for technical advice under the provisions of Rev. Proc. 2015–2 (or successor). (ii) Statement required . The Form 3115 must include a statement that the Form 3115 is filed under SECTION 8.02(1)(c) of Rev. Proc. 2015–13.

(d) New member of a consolidated group in CAP .

(i) In general . SECTION 8.02(1) (no audit protection for taxpayers under examination) does not apply to a change in method of accounting for an item requested by the common parent of a consolidated group that is participating in the Compliance Assurance Process (CAP) on behalf of a new member of the consolidated group for the taxable year the new member became a member of the consolidated group, if, as of the date the common parent of the consolidated group files the Form 3115:

(A) the new member is under examination solely because it became a member of the consolidated group during a taxable year in which the consolidated group participates in the CAP, and

(B) if the method of accounting for the item the new member is requesting to change is not an issue under consideration as described in SECTION 3.08 as of the date the taxpayer files the Form 3115.

(ii) Statement required . The Form 3115 must include: (A) a statement that the Form 3115 is filed under the provisions of SECTION 8.02(1)(d) of Rev. Proc. 2015– 13, and (B) a statement providing the date that the new member became a member of the consolidated group.

(e) Change resulting in a negative § 481(a) adjustment .

(i) In general . SECTION 8.02(1) (no audit protection for taxpayers under examination) does not apply to a change in method of accounting for an item that:

(A) results in a negative § 481(a) adjustment for that item for the year of change; and

(B) would have resulted in a negative § 481(a) adjustment in each taxable year

under examination if the change in method of accounting for that item had been made in the taxable year(s) under examination.

(ii) Example . A taxpayer placed Properties A and B in service in its 2010 taxable year. In its 2010 through 2013 taxable years, the taxpayer depreciated Property A using a 7-year recovery period instead of its correct 5-year recovery period and depreciated Property B using a 5-year recovery period instead of its correct 7-year recovery period. The taxpayer is under examination for its 2012 taxable year. The taxpayer filed a Form 3115 under this revenue procedure to request a change in method of accounting for its 2014 taxable year to change its methods of accounting for depreciation for Properties A and B . Under SECTION 8.02(1), the taxpayer generally does not receive audit protection for a change in method of accounting filed for its 2014 taxable year. However, under this SECTION 8.02(1)(e), the taxpayer may receive audit protection for the change in method of accounting for depreciation for Property A because the § 481(a) adjustment for that item required in its 2014 taxable year, and that would have been required in its 2012 taxable year, is negative. However, the taxpayer does not receive audit protection for the change in method of accounting for depreciation for Property B because the § 481(a) adjustment for that item required in its 2014 taxable year, and that would have been required in its 2012 taxable year, is positive.

(iii) Statement required . The Form 3115 must include a statement that the Form 3115 is filed under the provisions of SECTION 8.02(1)(e) of Rev. Proc. 2015–13. (f) No examination-imposed change and item not under consideration .

(i) In general . Except as provided in SECTION 8.02(1)(f)(ii), for a taxpayer that is under examination for one or more taxable years on the date the taxpayer files a Form 3115, SECTION 8.02(1) (no audit protection for taxpayers under examination) ceases to apply to the change in method of accounting for that item as of the date immediately following the earliest date that any of those examinations ends for the taxable year(s) subsequent to that taxable year and prior to the year of change to which the Form 3115 applies, if by the earliest date that any of those examinations ends:

(A) the examining agent(s) does not propose an adjustment for the same item that is the subject of the Form 3115 for the taxable year(s) under examination; and

(B) the method of accounting for that same item is not an issue under consideration within the meaning of SECTION 3.08. (ii) Certain foreign corporations .

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tent with all the applicable provisions, (d) the taxpayer timely implements the change but does not otherwise comply with all the applicable provisions, or (e) the national office modifies or revokes the Commissioner’s consent for the change in method of accounting retroactively because the taxpayer misstated or omitted material facts. See SECTION 10.03.

(4) Change in sub-method of account- ing . The IRS may change a taxpayer’s method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if the taxpayer is changing a sub-method of accounting within the method of accounting. For example, an examining agent may propose to terminate the taxpayer’s use of the LIFO inventory method of accounting during a prior taxable year even though the taxpayer changes its method of valuing increments in the current year. In addition, a taxpayer that changes a LIFO inventory sub-method within five years of adopting or changing to the LIFO inventory method does not receive audit protection under this SECTION 8.01.

(5) CFC or 10/50 corporation . In the case of a change in method of accounting made on behalf of a CFC or 10/50 corporation, the IRS may change the method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change in which any of the CFC or 10/50 corporation’s domestic corporate shareholders computed an amount of foreign taxes deemed paid under §§ 902 and 960 with respect to the CFC or 10/50 corporation that exceeds 150 percent of the average amount of foreign taxes deemed paid under §§ 902 and 960 by the domestic corporate shareholder with respect to the CFC or 10/50 corporation in the shareholder’s three prior taxable years.

(6) Criminal investigation . The IRS may change a taxpayer’s method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if there is any pending or future criminal investigation or proceeding concerning (i) directly or indirectly, any issue relating to the tax

(A) In general . For a taxpayer that is a CFC or 10/50 corporation that is under examination for one or more taxable years on the date the CFC or 10/50 corporation files a Form 3115, SECTION 8.02(1) (no audit protection for taxpayers under examination) ceases to apply to the change in method of accounting for that item as of the date after the earliest date that any of those examinations ends (the first ending examination) if all of the conditions in SECTION 8.02(1)(f)(ii)(B) are met, in which case this SECTION 8.02(1)(f)(ii) applies for the taxable year(s) subsequent to that taxable year and prior to the year of change to which the Form 3115 applies.

(B) Conditions for SECTION 8.02(1)(f)(ii)(A) to apply . SECTION 8.02(1)(f)(ii)(A) applies as of the date all of the following conditions are met:

( 1 ) after the date that the first ending examination ends, all controlling domestic shareholders that are under examination for one or more taxable years on the date the first ending examination ends submit to their examining agents a signed copy of the Form 3115 to which this SECTION 8.02(1)(f) applies on which “90-day notice under SECTION 8.02(1)(f) of Rev. Proc. 2015–13” is typed or written on the top of the first page; and

( 2 ) as of the 90th calendar day after all controlling domestic shareholders submitted the signed copy of the Form 3115 as required by SECTION 8.02(1)(f)(ii)(B)( 1 ):

( a ) the examining agent(s) does not propose an adjustment for the same item that is the subject of the Form 3115 for the taxable year(s) currently under examination; or

( b ) the method of accounting for that same item is not an issue under consideration within the meaning of SECTION 3.08(1), 3.08(2), or 3.08(3). (iii) Examples . Example 1 . A taxpayer is under examination for 2011 and 2012 as of December 19, 2014, the date the taxpayer files a Form 3115 to request a change in method of accounting for 2014 to change its method of accounting for costs subject to § 263A under this revenue procedure. Under SECTION 8.02(1), the taxpayer generally does not receive audit protection for a change in method of accounting for which consent is requested while under examination. The 2011 examination ends July 1, 2015, while the 2012 examination is still ongoing. Under SECTION 8.02(1)(f), the taxpayer receives audit protection for the change in method of accounting for costs subject to § 263A as of July 2, 2015, the day immediately

following the date the 2011 examination ends, if by that date the examining agents do not propose an adjustment for costs subject to § 263A and the method of accounting for costs subject to § 263A is not an issue under consideration as described in SECTION 3.08, as long as no other provision of SECTIONS 8.02(2) through 8.02(7) applies to the taxpayer.

Example 2 . A taxpayer that is a CFC has two controlling domestic shareholders (Shareholder A and Shareholder B ) under examination for 2011 as of December 19, 2014, the date the taxpayer files a Form 3115 for 2014 to request a change in its method of accounting under this revenue procedure for costs subject to § 263A for purposes of determining its earnings and profits. Under SECTION 8.02(1), the taxpayer generally does not receive audit protection for a change in method of accounting for which consent is requested while under examination. The 2011 examination of Shareholder A ends July 1, 2015, while the 2011 examination of Shareholder B is still ongoing. On August 1, 2015, Shareholder B submits to its examining agent a signed copy of the Form 3115 with “90-day notice under SECTION 8.02(1)(f) of Rev. Proc. 2015–13” written on top of the first page. Under SECTION 8.02(1)(f)(ii), the taxpayer receives audit protection for the change in method of accounting for costs subject to § 263A for purposes of determining its earnings and profits as of October 30, 2015, 90 calendar days after Shareholder B submitted a signed copy of the Form 3115 to its examining agent, if by that date the examining agents do not propose an adjustment for costs subject to § 263A and the method of accounting for costs subject to § 263A is not an issue under consideration as described in SECTION 3.08(1), 3.08(2), or 3.08(3), as long as no other provision of SECTIONS 8.02(2) through 8.02(7) applies to the taxpayer.

(2) Change lacking audit protection . The IRS may change a taxpayer’s method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if the description of the change in the List of Automatic Changes, or other guidance published in the IRB, provides that the change is not subject to the audit protection provisions of SECTION 8.01.

(3) Change not made or made improp- erly . The IRS may change a taxpayer’s method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if: (a) the taxpayer withdraws or does not perfect its request (for example, by not providing requested supplemental information), (b) the national office denies the taxpayer’s request for consent to make a change in method of accounting, (c) the taxpayer does not timely implement the change in method of accounting consis

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payer’s federal tax liability for any taxable year prior to the year of change, or (ii) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any taxable year prior to the year of change.

(7) Issue under consideration . The IRS may change a taxpayer’s method of accounting for the same item that is the subject of a Form 3115 filed under this revenue procedure for taxable years prior to the requested year of change if the taxpayer’s method of accounting for the same item is an issue under consideration pursuant to SECTION 3.08 as of the date the taxpayer filed the Form 3115. However, for a CFC or 10/50 corporation, the preceding sentence does not apply to an item to which SECTION 8.02(1) (no audit protection for taxpayers under examination) ceases to apply pursuant to SECTION 8.02(1)(f)(ii) or that is the subject of a Form 3115 filed in a three-month window pursuant to SECTION 8.02(1)(a)(iii).

(8) Prior year IRS-initiated change . The IRS may make adjustments to the taxpayer’s returns for the same item for taxable years prior to the requested year of change to reflect a change in method of accounting imposed by the IRS for a prior taxable year pursuant to Rev. Proc. 2002–18 (or successor).