Late accounting-method change forms did not qualify for an extension

Plain-English summary

An S corporation intended to make two automatic accounting-method changes involving sections 263A and 472. Its return preparer did not timely file the return or the original and signed duplicate Forms 3115 because the taxpayer failed to return an e-file authorization, a key manager left the firm, remaining staff assumed the filing was complete, and pandemic-era work changes caused disruption. The taxpayer filed the return and forms after discovering the problem but waited almost a year before asking for an extension. Accounting-method elections receive late relief only in unusual and compelling circumstances because the government is otherwise deemed prejudiced. After a conference and further submission, the IRS found that the taxpayer had not shown unusual and compelling circumstances. It denied the requested extension under Treasury Regulation section 301.9100-3.

Ruling snapshot

• Question: May the taxpayer receive extra time to file two Forms 3115 for automatic accounting-method changes under sections 263A and 472?
• Outcome: Denied
• Key authorities: IRC § 446(e); Treas. Reg. §§ 1.446-1(e)(3), 301.9100-1, and 301.9100-3(c)(2); Rev. Proc. 2015-13

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202348007 Third Party Communication: None
Release Date: 12/1/2023 Date of Communication: Not Applicable
Index Number: 9100.00-00, 9100.10-00,
9100.10-01 Person To Contact:
---------------------, ID No. -----------------
-------------------------------------------- Telephone Number:
-------------------------- ---------------------
--------------------- Refer Reply To:
CC:ITA:B06
--------------------------------------- PLR-105325-23
Date:
September 05, 2023

Legend:

Taxpayer = ----------------------------------------------------------------------------------------------
------------------------

Year = -------
CPA = ------------------------------
Date1 = -------------------
Date2 = -------------------
Date3 = -------------------
Date4 = ------------------

Dear ---------------:

This letter responds to a letter and subsequent correspondence submitted by Taxpayer.
Taxpayer has requested that the Commissioner of Internal Revenue give it an extension
of time pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration
Regulations to file the originals and signed duplicate copies of two Forms 3115,
Application for Change in Accounting Method. These documents should have been
filed by Taxpayer on or before the extended deadline for filing its federal income tax
return for the Year taxable year pursuant to section 6.03(1)(a)(i) of Rev. Proc. 2015-13,
2015-5 I.R.B. 419, however Taxpayer failed to do so.

                                                 FACTS

Taxpayer represents the following facts:

Taxpayer is an S corporation. CPA prepares Taxpayer’s federal income tax returns.
Taxpayer computes taxable income on a calendar year basis using an overall accrual
method of accounting. In computing taxable income, Taxpayer also uses methods of
accounting under §§ 263A and 472 of the Internal Revenue Code.
PLR-105325-23 2

For the Year taxable year, Taxpayer decided to change its accounting method for
§§ 263A and 472. It also decided that the changes could be implemented via the
automatic change administrative procedures. Given this decision, Taxpayer was to
have filed two originals and two copies of Forms 3115 no later than when it filed its
federal income tax return for Year.

Taxpayer failed to timely file its federal income tax return for Year and failed to timely
file both the originals and signed duplicate copies of the two Forms 3115. This failure to
timely file Taxpayer’s tax return and the required Forms 3115 was due to various
mistakes. Taxpayer failed to return to CPA a Form 8879, IRS e-file Signature
Authorization. Because of this failure, CPA’s software tracking system failed to update
and CPA was not aware of the tax filing dates for Taxpayer. Additionally, a manager of
CPA, who was integrally involved with Taxpayer’s tax filings, left the employ of CPA
before the due date of Taxpayer’s Year federal income tax return. The remaining CPA
staff assumed that the exiting manager had fulfilled Taxpayer’s tax obligations for Year.
Lastly, CPA and Taxpayer were both dealing with significant changes to their work
practices and policies caused by the COVID emergency, including working remotely.

Taxpayer discovered its failure to file the Year federal income tax return and the Forms
3115 on Date1, at which time Taxpayer filed the return and Forms 3115. Waiting
almost a year, on Date2, Taxpayer submitted this request for an extension of time to file
the originals and signed duplicate copies of the two Forms 3115.

A conference of right was held on Date3. Subsequently, Taxpayer responded with a
post-conference submission. On Date4, after considering the information provided at
the conference of right as well as in the post-conference submission and the earlier
submitted materials, Taxpayer’s authorized representatives were notified that an
extension of time to file the missing originals and signed duplicate copies of the two
Forms 3115 could not be granted.

                             RULING REQUESTED

Taxpayer requests an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 to
file the originals and signed duplicate copies of its two Forms 3115 so as to cure its
previous failure to timely file the forms in connection with the method changes under
§§ 263A and 472 that Taxpayer made in Year.

                             LAW AND ANALYSIS

Section 446(e) requires a taxpayer to secure consent before changing its method of
accounting. Section 1.446-1(e)(3)(i) of the Income Tax Regulations provides that, to
secure the Commissioner’s consent for a change in method of accounting, a taxpayer
must file an application on Form 3115 with the Commissioner.
PLR-105325-23 3

Rev. Proc. 2015-13 provides the current procedures by which a taxpayer may obtain the
Commissioner’s consent to change its method of accounting. A taxpayer complying with
all the applicable provisions of this revenue procedure has obtained the required
consent to change its method of accounting under § 446(e) and the regulations
thereunder.

Section 6.03(1)(a)(i) of Rev. Proc. 2015-13 provides that a taxpayer changing an
accounting method pursuant to the automatic filing provisions of Rev. Proc. 2015-13
must complete and file a Form 3115 in duplicate. The original must be attached to the
taxpayer’s timely filed (including any extensions) original federal income tax return for
the year of change, and a copy (with signature) of the Form 3115 must be filed with the
appropriate office of the Internal Revenue Service no earlier than the first day of the
year of change and no later than when the original is filed with the federal income tax
return for the year of change.

Section 6.03(4)(b) of Proc. 2015-13 provides that, except in unusual and compelling
circumstances or as provided in section 6.03(4)(a) of Rev. Proc. 2015-13 (the 6-month
automatic extension for filing a Form 3115), a taxpayer is not eligible for an extension of
time to file a Form 3115.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under rules set forth in §§ 301.9100-2 and 301.9100-3 to
make certain regulatory elections. For purposes of § 301-9100, an “election” includes a
request to change an accounting method.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for making elections that do not meet the
requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for an extension of time subject to
§ 301.9100-3 will be granted when the taxpayer provides evidence to establish to the
satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith
and that the granting of relief will not prejudice the interests of the Government.

Section 301.9100-3(b)(1) provides circumstances in which a taxpayer is deemed to
have acted reasonably and in good faith. Section 301.9100-3(b)(3) provides
circumstances in which a taxpayer is deemed not to have acted reasonably and in good
faith.

Section 301.9100-3(c)(2) imposes special rules for accounting method regulatory
elections. These rules provide that the interests of the Government are deemed to be
prejudiced when the regulatory election concerns accounting methods unless there are
unusual and compelling circumstances.
PLR-105325-23 4

What are unusual and compelling circumstances must be decided on a case-by-case
basis in light of all applicable facts and circumstances. T.D. 8742, 1998-1 C.B. 388
(February 2, 1998). For example, if the missed regulatory election relates to a
nonrecurring transaction, this fact would be considered in determining whether there are
unusual and compelling circumstances. Id.

While the Commissioner has discretion to grant an extension of time under the rules set
forth in §§ 301.9100-2 and 301.9100-3 to make certain regulatory elections, the
Commissioner must weigh the extension requested with “the policy of promoting
efficient tax administration.” T.D. 8742. Balancing Taxpayer’s desire to correct its
mistake with the need to provide “limited time periods” to perfect accounting methods
and considering why Taxpayer’s mistake occurred, the Commissioner concludes that
Taxpayer has failed to show unusual and compelling circumstances within the meaning
of § 301.9100-3(c)(2). Id. Accordingly, the Government’s interests are deemed
prejudiced.

                                   CONCLUSION

Based on the materials submitted by Taxpayer, the requirements of §§ 301.9100-1 and
301.9100-3 have not been satisfied in this case. Specifically, Taxpayer has failed to
demonstrate unusual and compelling circumstances and, accordingly, the Government's
interests are deemed prejudiced.

This ruling is directed only to Taxpayer, who requested it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to each of Taxpayer’s authorized representatives. The copies will be sent
electronically as is permissible under section 7.02(2) and (5) of Rev. Proc. 2023-1,
2023-1 I.R.B. 1. A copy of this letter is also being sent to the appropriate operating
division director.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,


                                   Cheryl L. Oseekey
                                   Senior Counsel, Branch 6
                                   (Income Tax & Accounting)

Enclosure:
PLR-105325-23 5

   Copy for § 6110 purposes

cc:
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