Accounting Method Change: How to File Form 3115

Businesses and individuals may find their method for accounting for income and expenses needs to be updated for reasons like adopting a more suitable practice or aligning with new regulations. The process for this change is formal and governed by the Internal Revenue Service (IRS). This guide explains the requirements and steps to modify how financial activities are reported for tax purposes.

Defining an Accounting Method Change

An accounting method, for federal tax purposes, is a consistent practice used to determine when income is recognized and when expenses are deducted. Treasury Regulation 1.446-1 specifies that a change in accounting method includes a change in the overall plan of accounting for gross income or deductions, or a change in the treatment of any “material item,” which involves the proper timing of when that item is included in income or taken as a deduction. Treating a material item the same way on two or more consecutive tax returns establishes an accounting method, regardless of whether that method is correct under tax law.

Common examples of accounting methods include the overall method, such as changing from the cash receipts and disbursements method to an accrual method. Other examples involve the treatment of specific items, like the method for valuing inventory by switching from First-In, First-Out (FIFO) to Last-In, First-Out (LIFO), or the method used for calculating depreciation. The core principle is that the change affects when an amount is reported, not necessarily if it is reported over the business’s lifetime.

It is also important to understand what does not qualify as a change in accounting method. The correction of a mathematical or posting error is not a method change, nor is a change in an item’s treatment resulting from a change in the underlying facts of a transaction. For example, if a business incorrectly expenses costs that should be capitalized and does so for two or more consecutive years, it has established an accounting method. To correct this, the business must request a formal change in accounting method because the consistent, albeit incorrect, treatment established a practice that affects the timing of deductions.

Types of Accounting Method Changes

Changes to an accounting method are either automatic or non-automatic, differing primarily in the nature of IRS consent required. For many common changes, the IRS has established streamlined procedures that grant automatic, or advance, consent to taxpayers who comply with the specified terms.

Automatic changes cover a wide array of situations that the IRS has identified as routine and generally permissible. Examples include changes from the cash method to the accrual method for certain taxpayers, changes in depreciation where an impermissible method was used, or changes to comply with tangible property regulations. The benefit of this process is its efficiency; there is no user fee, and consent is considered granted if the application is filed correctly and on time.

A non-automatic change is required for any modification that is not on the pre-approved list of automatic changes. For these changes, the taxpayer must request specific permission from the IRS National Office by filing an application. This process is more involved and requires a formal review by the IRS, which issues a private letter ruling approving or denying the request. A primary distinction of the non-automatic process is a user fee, which can be substantial. The IRS grants consent if it determines the proposed new method clearly reflects income.

Required Information and Form 3115 Preparation

The central document for requesting an accounting method change is Form 3115, Application for Change in Accounting Method. An important part of the form is a detailed description of the present and proposed accounting methods. For automatic changes, the taxpayer must identify the specific designated change number (DCN) from the applicable IRS revenue procedure, which directs the IRS to the specific type of change being made.

A significant calculation on Form 3115 is the Section 481(a) adjustment. This adjustment represents the cumulative financial difference between the old accounting method and the new one, calculated as of the beginning of the year of change. It is designed to prevent the duplication or omission of income or deductions that would otherwise occur because of the switch in methods.

To calculate it, the taxpayer must recompute the income and expenses for all prior years as if the new method had always been in place and compare that to what was actually reported under the old method. The result is a net Section 481(a) adjustment, which can be either positive or negative. A positive adjustment indicates an increase to taxable income, while a negative adjustment signifies a decrease. This calculated figure is reported in Part IV of Form 3115 and is needed to correctly implement the change.

The Filing Process and Post-Filing Considerations

The filing mechanics for a prepared Form 3115 depend on whether the change is automatic or non-automatic. For an automatic change, a copy of the completed Form 3115 must be attached to the taxpayer’s timely filed federal income tax return for the year of the change. A second, signed copy must also be mailed to the Internal Revenue Service in Ogden, UT.

For a non-automatic change, the original Form 3115 must be filed with the IRS National Office by the last day of the tax year for which the change is requested. This filing must be accompanied by the applicable user fee; for 2025, this fee is $43,700 for many requests. If the IRS approves the request, it sends a letter ruling, a copy of which must be attached to the tax return for the year of change.

The Section 481(a) adjustment is reported on the tax return for the year of change, but the timing of its recognition depends on whether it is positive or negative. A negative Section 481(a) adjustment, which decreases taxable income, is generally taken in full in the year of the change. A positive adjustment, which increases taxable income, is typically spread ratably over four tax years, but taxpayers can elect to recognize a positive adjustment under $50,000 entirely in the year of change.

Filing Form 3115 provides audit protection. Once a valid Form 3115 is filed, the IRS is precluded from requiring the taxpayer to change its method of accounting for the same item for a tax year prior to the year of change. This protection means that if a taxpayer voluntarily corrects an impermissible method, the IRS cannot later impose penalties or adjustments related to that method in earlier years.