Accidentally checked box for accrual?

A new client that is a partnership and files a 1065 has consistently recorded income on the cash method. This entity has been around for 5 years and on the returns they have checked the box as accrual even though income was recorded on the cash basis for all 5 years. The client's revenues are small enough they can be on the cash method and are not required to be on accrual.
I know after 2 years you have established a method of accounting.

Is the client technically on the cash method or accrual? And any suggestions on how to correct. The adjustment to accrual is not small and I would rather not have to file a 3115.

I think the question is whether the accounting method chosen was based upon the box checked on the return or the method actually used. I'd argue the latter, although I have not researched it. My gut reaction is to make the correct disclosure going forward and attach a statement to the return explaining that the wrong box was checked in prior years, and that the taxpayer has always used the cash method as the basis for maintaining books and records and for preparation of the income tax returns.

I think client is on cash method, can check cash going forward, and does not need a disclosure. Easy for me to say; I don't do returns.

Len is on to something here. I attended a seminar recently and the presenter, a real technician, not someone who teaches because they can’t do; pardon the grammar, said if an entity/business files their tax return in a manner that is commiserate with the cash method and the accrual box was always checked; simply check the cash box and keep on rolling.

I couldn’t believe it. I thought he was going to make us fill out a 3115 by hand, but nope. He said he’s never had an issue by doing it this way. The presenter has many years of complicated return filing experience, but if this makes you squeamish; I’m with you!!

Squeamishness not necessary here. The way you adopt a method has nothing to do with that box.

Me thinks you are correct sir.

There was a case in the Tax Court on this issue within the last week or two. The case makes clear that the Service believes that the actual use of a method is important:

Respondent replies that petitioner elected the accrual method of accounting, that it actually used that method, and that it was required to use that method because it was “necessary to use an inventory.”

Given this case, I think that if we had an unusual fact pattern, i.e. a taxpayer whose books are consistent with both cash and accrual, I think initially and subsequently checking the box would control the method used when they first had A/R in a later year. It would appear to be a doctrine of election issue.

The doctrine of election as it applies to federal tax law consists of two elements: (1) There must be a free choice between two or more alternatives; and (2) there must be an overt act by the taxpayer communicating the choice to the Commissioner, i.e., a manifestation of the choice. See Grynberg v. Comm'r, 83 T.C. 255, 261 (1984).

In this situation, I've tended to say that there should be an attached statement so that a human reviewer can see why a different box was checked and avoid the need for an audit. On the other hand, if the Service switches to automated notices for changes in the checkbox unaccompanied by a Form 3115, an attached statement or even a Form 8275 would probably be ineffective. And we are probably closer to the latter than any of us would like.

Edit: I could also be wrong and there may be case law on point that I am forgetting late on this Friday evening.

The adjustment to accrual is not small and I would rather not have to file a 3115.. I construed that to mean there were unreported receivables of a substantial amount, which would not be unusual.

Yeah. I'm just explaining why I agree with JAD. Probably should have said that.

Thanks for the responses! I appreciate the help.