3115 Question

Is there an automatic change number for a 3115 involving the use of customer deposits being improperly used by a cash basis taxpayer?

What's your intended change?
I usually change these folks to full accrual from cash basis to maintain the deferral.

There was Rev Proc 91-31, but there is not currently a general purpose change for this issue. Switching to accrual with the one-year deferral could be a solution, but a change from deposit to prepaid income could exist under both cash and accrual. If a switch to accrual was doable, I'd suggest calling the IRS attorney in charge of that CAM to see if the deposit change could be included.

I think I have the exact same issue. New client was given wrong advice by prior preparer. Cash basis taxpayer receives refundable deposits from customers. Their tax preparer made them include it income.

The taxpayer (with the aid of a new tax preparer) attempted to change their accounting without filing a Form 3115. IRS audited and reversed this and told them that while they agree this is not income when received, they need to file the 3115.

They have contacted me and I am trying to figure how you do this on the Form 3115. Do we change to overall cash basis (even though already on the cash basis) and include this in that change?

Having worked with Brian on several 3115s for my clients, I believe that the answer is no, you don't say that you are changing to cash method when you are already on the cash method. You are not changing your overall method of accounting. You are changing the accounting treatment of a specific item.

Can you call the auditor and ask him for the change number? He won't know, but perhaps he will know who to ask.

Some links, perhaps helpful, perhaps not. There must be some instruction on how to do this somewhere.
https://www.irs.gov/irm/part4/irm_04-011-006

See (5)

A change in the characterization of an item may constitute a change in method of accounting if the change has the effect of shifting income from one period to another. For example, a change from treating an item as income to treating the item as a deposit is a change in method of accounting. See Rev. Proc. 91-31: Diebold, Inc. v. United States, 16 Cl. 193 aff'd. 891 F.2d 1579 (Fed. Cir. 1989) cert. denied 498 U.S. 823 (1990) (inventory to capital asset); Pacific Enterprises v. Commissioner, 101 T.C. 1 (1993) ("working gas" (inventory) to "cushion gas" (capital asset)); Humphrey, Farrington & McClain v. Commissioner, T.C. Memo. 2013-23 (advanced litigation expenses from deductible business expense to loans).

This article says that RP 91-31 provides an automatic procedure for making the change.

https://www.thetaxadviser.com/issues/20 ... hange.html

But Brian’s post seems to indicate that the RP is not necessarily helpful. Have you taken a look at it?

Thank you, JAD.

The RP is good because it discuss the tax treatment of deposits and confirms that this would be an accounting change. However, the procedure is only applicable to utility companies.

Sorry I do not know more. I liked the world better when Brian was operating his own practice. He was an invaluable resource and I was so grateful to be able to consult with him.

The IRS change of accounting rep. said to use DCN 233 - Change to overall cash basis, even though they are already on the cash basis.