Can You File Form 3115 With an Amended Return?
While an amended return corrects errors, changing a prior year's accounting method with Form 3115 follows a distinct process for the current tax year.
Taxpayers use IRS Form 3115, Application for Change in Accounting Method, to request a change in their accounting practices. A common question is whether this form can be filed with an amended return to change a method used in a prior year. The answer depends on the difference between correcting an error and changing an accounting method, as the IRS has separate procedures for each.
Distinguishing an Accounting Method Change from an Error
An accounting method is a consistent practice used to determine the timing of income and deductions. A change in accounting method involves altering this consistent treatment for a material item, which is any item that affects when income is reported or an expense is deducted. Examples include switching from the cash basis to the accrual basis, altering how inventory is valued, or changing the method of depreciation for an asset. If a business has used an improper method for two or more consecutive years, it must file Form 3115 to switch to a permissible one.
Conversely, an error correction involves fixing a mistake on a prior tax return, such as mathematical or posting errors, or a misapplication of the facts in a single year. For instance, incorrectly calculating the total depreciation on an asset due to a typo is a mathematical error. These mistakes are rectified by filing an amended return, such as Form 1040-X for individuals or Form 1120-X for corporations. Using an amended return to change a consistent accounting practice is generally not permitted.
The Standard Procedure for Filing Form 3115
The standard process for filing Form 3115 is tied to the tax return for the “year of change,” which is the first year the new accounting method is used. The original, unsigned Form 3115 must be attached to the federal income tax return for that year, which must be filed by its due date, including any extensions.
For most automatic changes, there is a duplicate filing requirement. A signed copy of the same Form 3115 must be sent separately to the IRS National Office. This duplicate copy must be filed no earlier than the first day of the year of change and no later than the date the original form is filed with the tax return.
Addressing a Change for a Prior Year
As a general rule, a taxpayer cannot file Form 3115 with an amended return to retroactively change an accounting method for a prior year. If a taxpayer used an impermissible accounting method, the correction is not made by amending old returns. Instead, the taxpayer must file Form 3115 with the tax return for the earliest tax year not closed by the statute of limitations, which is typically the current year’s return.
To account for the impact of the change on prior years, the taxpayer must calculate a Section 481(a) adjustment. This adjustment is a “catch-up” amount that reflects the cumulative difference between the old and new methods. It prevents the duplication or omission of income or deductions that would otherwise occur from the change. A negative Section 481(a) adjustment is generally deducted in full in the year of change, while a positive adjustment is typically spread over four years.
There is a narrow exception to this rule. A Form 3115 for an automatic change may be filed with an amended return in limited circumstances. This is most common when a taxpayer is under an IRS examination and receives permission from the examining agent or director.
Requesting Late Filing Relief
When a taxpayer misses the deadline for filing a Form 3115 for a non-automatic change, a procedure known as “9100 Relief” may be available. This relief is named after Treasury Regulation section 301.9100-3 and provides a formal way to request an extension of time to file Form 3115. This is a formal application submitted to the IRS National Office.
To obtain 9100 Relief, the taxpayer must provide a detailed explanation demonstrating they acted reasonably and in good faith and that granting the relief will not prejudice the government. This process involves a substantial user fee of $14,500 for most requests, though reduced amounts may be available for taxpayers with lower gross income. The IRS will not grant an extension except in unusual and compelling circumstances.