Unusual circumstances allow late Form 3115

Plain-English summary

A construction contractor changed its accounting method for prepaid insurance expenses under the automatic-change procedures. Its timely S corporation return reflected the new method, referenced Form 3115, and included the required section 481(a) adjustment, but the accounting firm's new paperless processing system caused the prepared Form 3115 and the required Ogden copy not to be filed. The taxpayer had supplied the necessary information and reasonably relied on experienced tax professionals, and the firm sought relief promptly after discovering the omission. The IRS found unusual and compelling circumstances, good-faith conduct, and no prejudice to the government. It granted 60 days to file Form 3115 properly under Rev. Proc. 2015-13.

Ruling snapshot

• Question: May the taxpayer file a late Form 3115 for its automatic prepaid-insurance accounting-method change?
• Outcome: approved; a 60-day extension was granted
• Key authorities: IRC § 481(a); Treas. Reg. §§ 1.263(a)-4(f), 301.9100-1, 301.9100-3; Rev. Proc. 2015-13; Rev. Proc. 2015-14

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702021 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------------- -------------------------------,
-------------- ID No. ------------------
-------------------------------- Telephone Number:
-------------------------------- ----------------------
------------------------- Refer Reply To:
CC:ITA:B02
PLR-113134-16
Date: October 17, 2016

TY: -------

LEGEND:

Taxpayer = ---------------------------------------------------------
Owner = --------------------------
FirmX = ---------------
CPA1 = ----------------------------------------------------------------
CPA2 = ----------------------------------------------------------------
FirmY = ------------------------------------
CPA3= ---------------------------------------------------------------------------------
-------------------------
FirmZ = --------------------------------
Date1 = ------------------
Date2 = ----------------------------------------------
Date3 = ----------------------
Date4 = --------------------------
Date5 = ----------------------
Date6 = -------------------
Month1 = -------------
Month2 = ---------
Year1= -------
Year2 = -------
Year3 = -------
Year4 = -------
Tax Year = --------------------------------------------------

Dear -------------:
PLR-113134-16 2

This is in response to your letter of Date1 filed on your behalf by your authorized
representative. In the letter, Taxpayer requests an extension of time to file a late Form
3115 “Application for Change in Accounting Method” for Taxpayer’s Tax Year. This
request for relief is made in accordance with §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations.

Taxpayer represents the following facts:

Taxpayer operates as construction contractor, erecting steel structures. Taxpayer has
been in business since Year1 and elected S Corporation status in Year1. Taxpayer is
wholly owned by Owner.

Taxpayer engaged FirmX to provide compilation services and tax preparation services
for Taxpayer in Year2. FirmX provided these services to Taxpayer from Year2 through
Year4. Prior to Year4, Taxpayer capitalized its prepaid insurance expenses as a
prepaid asset and periodically adjusted the deductions as the asset expired. In Year4,
Taxpayer discussed with CPA1 the possibility of changing its method of accounting for
the prepaid insurance expenses so that Taxpayer could deduct those expenses in the
year that they were paid if they met the 12-month rule under § 1.263(a)-4(f) of the
Income Tax Regulations. Such a change would ordinarily qualify as an automatic
change of accounting method under section 10.05 of Rev. Proc. 2015-14, 2015-5 I.R.B.
50, and sections 9 and 6.03(1) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419. Taxpayer’s
management was not sophisticated in tax matters, but they believed that FirmX’s
experience with complex tax matters would allow FirmX to properly change Taxpayer’s
accounting method for the prepaid insurance expenses. Taxpayer's management
provided all of the necessary information to FirmX and expected FirmX to take all steps
necessary to file the proper forms to change the accounting method for the prepaid
insurance expenses beginning in Tax Year.

CPA1 of FirmX was the partner responsible for bringing all the CPA FirmX’s service
providers together to serve Taxpayer. CPA2 of FirmX, with 35 years of experience in
tax planning, review, and preparation was in charge of the tax compliance services for
Taxpayer. CPA2 of FirmX utilized various personnel in her office to prepare Taxpayer’s
Tax Year Form 1120S return in Month1 and Month2 of Year4. CPA2 of FirmX also
oversaw the preparation of Taxpayer’s Tax Year Form 3115 which was completed on
Date4.

On Date3, FirmX had acquired FirmZ, an accounting firm where Taxpayer was an
existing client. The acquisition of FirmZ led to the adoption of a new paperless system
for filing and storage of tax forms and records. The new tax return processing
procedures resulted in an inadvertent error by FirmX. The result was that Taxpayer’s
Tax Year Form 3115, although prepared, was not attached to Taxpayer’s timely
electronically-filed Tax Year Form 1120S. The Form 3115 was prepared and saved in
FirmX’s electronic file for Taxpayer. However, because a box was not checked on
PLR-113134-16 3

FirmX’s internal processing control sheet alerting processing that a Form 3115 was to
be attached to the return; it was inadvertently omitted from Taxpayer’s Tax Year Form
1120S, and the requisite copy was not filed with the IRS in Ogden, Utah as required by
section 6.03(1)(a)(i) of Rev. Proc. 2015-13. Taxpayer’s Tax Year Form 1120S,
however, was filed consistent with the method change, did reference the Form 3115,
and included the requisite section 481(a) adjustment. At the time the return was
electronically filed, no one was aware that the Form 3115 was omitted from the Tax
Year return and that a copy was not filed with the IRS in Ogden.

For reasons unrelated to this omission, Taxpayer hired a new accounting firm around
Date5, called FirmY. The omission of Taxpayer’s Tax Year Form 3115 was not
discovered until Date6, when CPA3 asked Taxpayer for a copy of it. When Taxpayer
asked FirmX for a copy of its Form 3115, Firm X discovered that it failed to file
Taxpayer’s Tax Year Form 3115 with Taxpayer’s Tax Year Form 2011S and failed to file
a copy with the IRS in Ogden. As soon as the omission was discovered, FirmX
immediately contacted Taxpayer and began preparing this letter requesting relief from
the Service.

LAW:

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 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make certain regulatory elections. Section 301.9100-1(b) defines a "regulatory
election" as an election whose due date is prescribed by a regulation published in the
Federal Register, or a revenue ruling, revenue procedure, notice or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-3(a) provides that requests for relief under § 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 granting
relief will not prejudice the interests of the government.

Section 301.9100-3(c)(1) provides that the interests of the government are prejudiced if
granting relief would result in the taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made. The interests of the government are ordinarily
prejudiced if the taxable year in which the regulatory election should have been made,
PLR-113134-16 4

or any taxable years that would have been affected by the election had it been timely
made, are closed by the period of limitations on assessment.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2) provides that the interests of the government are
deemed prejudiced, except in unusual or compelling circumstances, if the accounting
method regulatory election for which relief is requested is subject to the advance
consent procedures for method changes, requires a § 481(a) adjustment, would permit
a change from an impermissible method of accounting that is an issue under
consideration by examination or any other setting, or provides a more favorable method
of accounting if the election is made by a certain date or taxable year.

Section 6.03(4)(b) of Rev. Proc. 2015-13 provides that, “Except in unusual and
compelling circumstances, a taxpayer is not eligible for an extension of time to file a
Form 3115, and is not eligible to make a late election under section 7.03(3)(d) of Rev.
Proc. 2015-13 under §§ 301.9100-1 and 301.9100-3. See § 301.9100-3 (c) (2) and
Rev. Proc. 2014-1 (or successor).” The facts, as submitted by Taxpayer, however,
indicate that the circumstances in this instance are unusual and compelling. Taxpayer
engaged FirmX believing their experience with complex tax matters would allow FirmX
to properly change Taxpayer’s accounting method for the prepaid insurance expenses.
Taxpayer's management provided all of the necessary information to FirmX and relied
on them to take all steps necessary to file the proper forms to change the accounting
method beginning in Tax Year. Firm X prepared the Form 3115 and prepared the return
as if the automatic change in method of accounting had been properly made.
Taxpayer’s Tax Year return referenced the Form 3115 and included the requisite
section 481(a) adjustment. It was an inadvertent misstep by one of Firm X’s employees
that prevented the Form 3115 from being attached to Taxpayer’s Tax Year return and
prevented a copy of the Form 3115 from being filed with the IRS in Ogden. Firm X’s
failure to file Taxpayer’s Form 3115 was beyond Taxpayer’s control. Accordingly, we
have determined that, under these circumstances, Taxpayer may make a late election
under section 7.03(3)(d) of Rev. Proc. 2015-13 in accordance with Treas. Reg. §§
301.9100-1 and 301.9100-3.

Taxpayer has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration regulations. The information and representations made
by Taxpayer establish that Taxpayer acted reasonably and in good faith, and that there
are unusual and compelling circumstances meriting a late election under section
7.03(3)(d) of Rev. Proc. 2015-13. The affidavits presented show that Taxpayer
reasonably relied on qualified tax professionals for the proper filing of Taxpayer’s
federal tax return and accompanying Form 3115. The affidavits presented also show
that FirmX inadvertently failed to file the Form 3115 with Taxpayer’s Form 1120S return
and failed to file a copy with the IRS in Ogden, but that the return otherwise reflected
the intended change in accounting method, referred to the Form 3115, and included the
requisite section 481(a) adjustment. Upon discovery of the error, FirmX filed for relief
PLR-113134-16 5

on behalf of Taxpayer before the government discovered the error.

The information and representations presented establish that Taxpayer is not seeking to
alter a return position for which an accuracy-related penalty had been or could be
imposed under § 6662 at the time relief was requested. Taxpayer is not using hindsight
in requesting relief, and no facts have changed since the time of the original filing
deadline.

Finally, granting an extension will not prejudice the interests of the government. It is
represented that Taxpayer would not have a lower tax liability in the aggregate for all
taxable years affected, if given permission to file the Form 3115 at this time than
Taxpayer would have had if had been properly filed by the original due date of the
return. Taxpayer has represented that no taxable years are closed by the period of
limitations on assessment, and the IRS had not discovered the Form 3115 was missing
before Taxpayer filed for relief.

CONCLUSION:

Based upon our analysis of the facts as represented, Taxpayer acted reasonably and in
good faith, and granting relief will not prejudice the interests of the government.
Therefore, the requirements of §§ 301.9100-1 and 301.9100-3 have been met.
Taxpayer is granted an extension of 60 days from the date of this ruling to properly file
the Tax Year Form 3115 in accordance with section 6.03(1) of Rev. Proc. 2015-13.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
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 your authorized representative. Enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the letter when it is disclosed under
§ 6110 of the Code.
PLR-113134-16 6

A copy of this ruling should be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                  Sincerely,


                                  Bridget E. Tombul
                                  _____________________________
                                  BRIDGET E. TOMBUL
                                  Chief, Branch 2
                                  Associate Chief Counsel
                                  (Income Tax & Accounting)



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Enc: copy for § 6110 purposes