With the September 15, 2015 filing season now behind us, one thing that stands out is how proper implementation of the final Tangible Property Regulations yielded large benefits – allowing taxpayers to deduct assets that were previously capitalized and/or to correct prior year mistakes in depreciation. Taxpayers who went through this process most likely filed the Form 3115 to report changes in their method of accounting and any Internal Revenue Code Section 481(a) adjustments associated with adopting those changes. However, suppose there were mistakes in the Form 3115 or the taxpayer discovers additional information that changes the IRC 481(a) adjustment? What recourse does the taxpayer have at this point to revise the previously filed Form 3115?
Fortunately, the IRS anticipated this possibility and provided guidance in Revenue Procedure 2015-13 on how a taxpayer can correct or add to a previously filed Form 3115. The relevant section of the Revenue Procedure is called “Correspondence regarding a previously filed Form 3115”. The additional information (quaintly referred to in the Revenue Procedure as “additional correspondence”) is attached behind page 1 of the previously filed Form 3115, which is then mailed to the IRS in Ogden, Utah. If the taxpayer is under examination, before an Appeals Officer, or before a Federal Court, a copy of the additional correspondence must also be provided to the examining agent, Appeals Officer, or government counsel no later than the date the revised Form 3115 is mailed to the IRS in Ogden, Utah. This procedure is available when the revised Form 3115 involves the same automatic designated method change and is being filed to correct or revise the previously filed Form 3115.
Alternatively, what if a taxpayer decided not to file or adopt the Tangible Property Regulations in 2014 but wants to adopt them in 2015? There is no prohibition against taking such action in the 2015 tax season, but there is likewise no guarantee that the Form 3115 will be accepted without a challenge. The IRS has a right to audit these filings and to require the taxpayer to amend the 2014 tax return to reflect all necessary changes associated with adopting the regulations in 2014. If there was a positive adjustment (income recognition) associated with the 2015 filings, the taxpayer could be faced with paying additional tax including interest and penalties. So, taxpayers can take some comfort in knowing that there is an option to adopt the Tangible Property Regulations in 2015 but should be aware of the risks associated with it.
If for any reason you find it necessary to correct your previously filed Form 3115, please contact Andrew Cohen, Tax Manager, at firstname.lastname@example.org or 212-842-7649, or your Friedman LLP tax professional.