August 24, 2004
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Re: Revenue Procedure 2004–23, Methods of Accounting—Automatic Consent Procedures—Acquiring or Creating Intangible Assets
Dear Sir or Madam:
The American Institute of Certified Public Accountants (AICPA) respectfully offers the enclosed comments regarding the requirements found in Section 4.02 of Revenue Procedure 2004-23. The AICPA is the largest professional association of certified public accountants in the United States, with more than 350,000 members in business, industry, public practice, government, and education.
The enclosed comments were developed by members of our Tax Accounting Technical Resource Panel and approved by the Tax Executive Committee. We would be pleased to discuss these comments with you or a member of your staff at any time. If you have any questions, please contact either Barry Tovig, Chair of the Tax Accounting Technical Resource Panel, at (202) 327–8821; or George White, AICPA Technical Manager, at (202) 434–9268.
Robert A. Zarzar
Chair, Tax Executive Committee
CC: Sharon Kay, Tax Specialist
Robert M. Brown, Associate Chief Counsel (IT&A)
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on the Requirements of Section 4.02 of Revenue Procedure 2004–23
August 26, 2004
Developed by the Tax Accounting Technical Resources Panel
George White, AICPA Technical Manager
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Revenue Procedure 2004-23, Methods of Accounting - Automatic Consent Procedures - Acquiring or Creating Intangible Assets
A. Automatic Consent Procedures
On December 31, 2003, the Internal Revenue Service and Treasury Department released Treasury Decision 9107, issuing final regulations, including subsection (f) of reg. section 1.263(a)–4 dealing with the treatment of intangible assets.
The final regulations under section 1.263(a)–4 are effective for amounts paid or incurred on or after December 31, 2003. Subsection (p)(1) of the regulation states that: "For the taxpayer's first taxable year ending on or after December 31, 2003, the taxpayer is granted the consent of the Commissioner to change its method of accounting to comply with this section." One of the provisions of consent was that the automatic consent procedures issued under reg. section 1.446–1 and found in Rev. Proc. 2002–9, 2002–3 I.R.B. 327, must be followed.
Section 6.02(3) of Rev. Proc. 2002–9 states that the original copy of the Form 3115 "must be attached to the taxpayer's timely filed (including extensions) original federal income tax return for the year of change."
On March 24, 2004, the Internal Revenue Service issued Rev. Proc. 2004–23, 2004–16 I.R.B. 785, which "modified and amplified Rev. Proc. 2002-9 to include automatic change." Section 6.01 of the Rev. Proc. 2004–34 states:
If a taxpayer within the scope of this revenue procedure has filed a Form 3115 (including a copy of Form 3115 filed with the national office in advance of filing the taxpayer's federal income tax return) to change to a method of accounting provided in the final regulations for its first taxable year ending on or after December 31, 2003, and the Form 3115 does not comply with the provisions of this revenue procedure, the taxpayer will not be considered to have filed the Form 3115 pursuant to the automatic change in method of accounting procedures referred to in section 1.263(a)–4(p).
The general rule is that such taxpayers must file an amended federal income tax return and attach an amended Form 3115 that complies with Rev. Proc. 2004-23. However, section 6.02 of Rev. Proc. 2004–23 provides for " limited relief for certain previously filed applications." The taxpayer is eligible for the alternative relief procedure on a Form 3115 filed prior to April 26, 2004, if the taxpayer:
- Prepares a written perjury statement that includes all of the information necessary to comply with Rev. Proc. 2004-23;
- Submits the written statement, with an attached copy of page 1 of the original Form 3115, to the national office at the special address provided. This statement must be submitted by the extended due date of the timely filed return. 1
- Attaches the written statement and a copy of the original Form 3115 to the taxpayer's federal income tax return for the taxpayer's—
(i) First taxable year ending on or after December 31, 2003, or
(ii) Second taxable year if the original return was filed before April 26, 2004, and the return included a Form 3115, a copy of which was filed with the national office, and the section 481(a) adjustment was computed correctly.
- Complies with all other provisions of this revenue procedure.
B. Cost to Taxpayers and Practitioners
The issuance of Rev. Proc. 2004–23 occurred after the original due date of the tax returns filed by calendar year corporations. Because many small- and medium-sized businesses are organized as partnerships and S corporations, they have the responsibility to provide their owners with the Schedule K1 information in order for the owners to file accurate and timely individual returns. Often, the corporate taxpayer itself has a strong desire to file by the original due date of the return. It is therefore incumbent on practitioners serving such clients to deliver business returns as early in the filing season as possible. In order to meet this responsibility, many practitioners followed the guidance offered in reg. section. 1.263(a)–4 and Rev. Proc. 2002–9 to effectuate changes offered by the new regulations. In many cases, practitioners were unable to wait for further guidance given the time constraints, or felt that the guidance in the regulation was sufficient to file a complete and accurate Form 3115.
Many such taxpayers made changes only for one portion of the new regulations (e.g., the "12–month rule"). Practitioners making informal calls to IRS personnel were informed that the further guidance promised in the preamble to the regulations would not affect changes for single issues such as the 12–month rule, but that the guidance would focus on issues surrounding the calculation of the section 481(a) adjustment for multiple changes under the regulations, and procedures for dealing with Forms 3115 filed before the effective date of the regulations. Knowing this, and facing deadlines, many taxpayers filed forms following the guidance available, expecting that the result would be full compliance with the rules.
As noted above, Rev. Proc. 2004–23 was issued after the due date for a calendar year corporation. Many small and middle-market taxpayers received such guidance after they had already filed their returns in a timely manner. Furthermore, for taxpayers that made only a single-issue change (e.g., 12–month rule) the requirements of Rev. Proc. 2004–23 were substantially procedural. For example, a Form 3115 previously filed under the guidance set forth in reg. section 1.263(a)–4 and Rev. Proc. 2002–9 might require the following changes to comply with Rev. Proc. 2004-23:
- The designated accounting method change number (78) was not included on line 1, Part I, as requested at Section 4.02(3)(c) of Rev. Proc. 2004–23. However, the Forms 3115 that were filed describe the change by a check in the "other" box, and a description of "Reg. Section 1.263(a)–4(p)(1)." In addition, the type of accounting method requested is specified as "deduct qualified prepaid expenses."
- The original Form 3115 was mailed to P.O. Box 7604 as prescribed in the instructions to the December 2003 version of Form 3115, instead of P.O. Box 7616, which is the address prescribed in Rev. Proc. 2004-23.
- Certain portions of Form 3115 were completed by practitioners filing under the guidance of Rev. Proc. 2004-9 and the regulations, which was noted as not required under Rev. Proc. 2004-23.
Practitioners faced with this challenge are, by and large, small- to medium-sized accounting firms who have made their best attempt to comply with the ambiguous guidance that was available, while attempting to balance their clients' desire for filing returns by the due date. Furthermore, many such practitioners are unable to recoup the cost of this additional compliance burden from their smaller clients. Therefore, the limited relief provisions offered in Rev. Proc. 2004–23 actually create a hardship on practitioners.
To utilize the limited relief initiative provided in section 6.02 of Rev. Proc. 2004–23 (described above), the practitioner must draft a new document, obtain a signature from a client that they would not otherwise be in contact with until next filing season, mail the document with the requisite attachments, and remember to make specific attachments to the return filed the next year. This is a burdensome process for minor procedural changes to the form as originally filed. Very little information of substance is offered in these cases for the burden that it causes practitioners.
C. Alternative Means of Compliance
The AICPA recognizes the value to the Service as well as to tax professionals and taxpayers, of standard compliance procedures for filing a request for a change in method of accounting. The AICPA is concerned, however, with the burden that the required measures place on practitioners and taxpayers who filed on or before the March 15 due date for corporate returns in good faith and in accordance with the instructions provided in subsection (p) of final reg. section 1.263(a)–4, a Form 3115.
The AICPA recommends that the IRS take action to alleviate this burden on small taxpayers and practitioners. A reasonable approach would be to issue additional guidance providing that taxpayers who filed a Form 3115 before March 24, 2004, will not be required to submit a perjury statement or amended Form 3115, provided that (1) the originally filed Form 3115 complies in all respects with reg. section 1.263(a)-4; and (2) the section 481(a) adjustment does not change as a result of the guidance provided in Rev. Proc. 2004-23. Additionally, we recommend that, even if the section 481(a) adjustment changes, the taxpayer should receive the same treatment illustrated herein if taxable income is not affected. 2 This would allow those taxpayers who are substantially in compliance with the regulations through their first filing to avoid the extra steps provided in Rev. Proc. 2004-23 while still allowing IRS to collect data when a substantive change occurs.
However, if this does not prove acceptable, other possible solutions might include:
- Issuance of additional guidance modifying Rev. Proc. 2004–23 to remove the requirement in section 6.02 (2) that the perjury statement must be submitted separately to the national office. This will still require the taxpayer to complete the additional information, but allow the taxpayer to include such information with the subsequent year's filing, providing some relief to the practitioner and taxpayer, or;
- Issuance of additional guidance that simply extends the due date for submission to the national office of the perjury statement as required under section 6.02(2) of Rev. Proc. 2004–23 to the extended due date of the return for the year following the year of change (e.g., September 15, 2005, for a calendar year taxpayer). This alternative provides the same information to the IRS as would be received under Rev. Proc. 2004–23 as originally issued, but would allow practitioners to combine the task of providing such information with the filing season of the subsequent year, therefore allowing more flexibility to practitioners who only interact with their clients during the filing season.
The AICPA believes that action on one of these alternatives will greatly reduce the compliance burden on small taxpayers and the practitioners who provide tax services to them while still accomplishing the Service's objective of compliance with the final regulations. With the due date for compliance with this revenue procedure currently set for September 15, 2004, for calendar year taxpayers, we believe that immediate action is required on this issue to ensure that it is beneficial to taxpayers.
1. See Section 6.02(3)(a) of Rev. Proc. 2002–9, including the automatic extension described in Section 6.02(3)(b)(i).
2. Under Section 5 of Rev. Proc. 2004-23, the section 481(a) adjustment resulting from the change in accounting method is computed taking into account only amounts paid or incurred in taxable years ending on or after January 24, 2002, net of any recovery of capitalized costs. The computation of the section 481(a) adjustment is illustrated in an example. The example illustrates that only amounts paid or incurred in taxable years ending on or after January 24, 2002, are included in the section 481(a) adjustment. In addition, apparently because the final regulations apply to amounts paid or incurred on or after December 31, 2003, the section 481(a) adjustment includes amounts paid or incurred prior to December 31, 2003, as if such amounts were accounted for under the taxpayer's prior method of accounting. For accounting method changes resulting in a negative section 481(a) adjustment, this computation methodology should produce the same result as if the section 481(a) adjustment were computed as of the beginning of the taxable year.