The US Internal Revenue Service ( IRS) has published an updated International Practice Unit titled IRC 481(a) Adjustments for IRC 263A Accounting Method Changes.

This practice unit was updated to remove references to resources that are no longer current, relevant or available, and supersedes the 03/11/2020 practice unit with the same title.

In general, an accounting method is a set of rules used to determine when and how a taxpayer takes income and expenses into account for federal income tax purposes. A method of accounting must involve timing. If an accounting practice for an item does not permanently affect the taxpayer’s lifetime taxable income, but does or could change the year in which taxable income is reported (or in which deductions are claimed), the accounting practice for the item involves timing and is therefore considered a method of accounting.

A Service-imposed change in accounting method (CAM) requires specific written notification to the taxpayer. If the Service does not provide written notice to the taxpayer that it is treating an accounting method issue as a CAM, then the taxpayer’s accounting method has not been changed. It is important to properly identify change in accounting method issues and properly compute the IRC 481(a) adjustment. A change to the tax treatment of IRC 263A costs, methods, allocations, etc., may be a CAM.

If multiple changes in accounting methods occur in the same year, then method change procedures generally deem the IRC 263A CAM to occur before any other CAM for that tax year. However, there are some changes that do not follow this general rule. See Treas. Reg. 1.263A-7(b).

First, if there is a change to a taxpayer’s overall method of accounting, such as from the cash receipts and disbursements method to the accrual method, in the same tax year a change to the method of accounting for costs subject to IRC 263A, the change to the accrual method must occur before the change to the method of accounting for IRC 263A costs. Second, if there are changes to a taxpayer’s method of accounting for depreciation in the same year a change to the method of accounting for IRC 263A costs and any portion of the depreciation is subject to IRC 263A, the change in the method for depreciation must occur before the IRC 263A method change.

In addition, there are a few other exceptions to this general rule. Certain LIFO changes made in the same year as changes to a method of accounting for IRC 263A costs are not required to follow this rule. For example, if there is a change to terminate the use of LIFO method or a change from using the specific goods LIFO method to using the dollar value LIFO inventory method in the same year a change to the method of accounting for IRC 263A costs, the changes to the LIFO method may occur before the IRC 263A changes.