On March 2, 2015, the Internal Revenue Service published long-awaited relief for small taxpayers implementing the new Tangible Property Regulations (“TPR”). This relief took the form of Rev. Proc. 2015-20. This revenue procedure allows each eligible small taxpayer to adopt most of the tangible property regulations on an effective cut-off basis, but without prior year audit protection. Relief is available for each qualifying separate and distinct trade or business and no taxpayer action is required to elect the relief provisions. The lack of an affirmative election has created a large problem for some taxpayers: Accidentally electing the relief provisions.
Rev. Proc. 2015-20 applies to a taxpayer with one or more separate or distinct trades or businesses that either has:
less than $10 million in assets on January 1, 2014 (for calendar year taxpayers), or,
average annual gross receipts of less than $10 million over the prior three years.
The revenue procedure requires no action on the part of a taxpayer’s qualifying trade or business to elect these provisions. For affected method changes, this is an all-or-nothing proposition: Use Rev. Proc. 2015-20 or use the normal method change procedures. The Service stated during an IRS webinar in July that taxpayers with qualifying trades or businesses that do nothing will be considered to have elected into the relief provisions of Rev. Proc. 2015-20.
If a taxpayer accidentally elects into Rev. Proc. 2015-20, there are three main issues for the taxpayer to confront.
First, there is no back-year audit protection for years before the year of change, (pre-2014 years for calendar year taxpayers). While this may not be a problem for the majority of taxpayers whose methods mostly comply with the new TPR already, taxpayers with deficient methods who would like a de facto cut-off method change will be at risk.
Second, the taxpayer would not be able to make any changes within the scope of Rev. Proc. 2015-20 on an automatic method change basis for five years. Depending on the taxpayer’s gross income, user fees for non-automatic method changes run from $2,200 to $8,600, with most taxpayers paying $8,600 per method change.
Third, the taxpayer would lose all §481(a) adjustments attributable to pre-2014 tax years when making a subsequent method change. More than the user fee, the lack of pre-2014 favorable adjustments will discourage taxpayers from making a method change in post-2014 tax years.
While the IRS’s position is unfavorable, they have also provided a solution. The IRS has publicly suggested that eligible taxpayers may elect out of Rev. Proc. 2015-20 by filing a statement to that effect with their 2014 tax returns. Since this would be a regulatory election, taxpayers who have already filed their 2014 returns should be able to use the §9100 relief provisions to file this statement with an amended return. For calendar year taxpayers, this amended return would be due by September 15, 2015 for C corps and S corps and October 15, 2015 for partnerships and individuals. Alternatively, taxpayers can file their 2014 returns with a Form 3115 for a method otherwise within the scope of Rev. Proc. 2015-20 to elect out of Rev. Proc. 2015-20. The §9100 relief rules are also available to file a Form 3115 with an amended 2014 tax return.
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