What Is a 99-6 Transaction for an Automatic Method Change?

An accounting method dictates when income and expenses are reported on a tax return. While the term “99-6 transaction” is outdated, it refers to changing an accounting method. The current framework, primarily under Revenue Procedure 2015-13, provides a list of changes that qualify for automatic consent, meaning taxpayers can change certain accounting methods without seeking advance permission from the IRS.

The purpose of the automatic consent procedure is to simplify the process for both taxpayers and the IRS. Instead of a lengthy application that requires a specific ruling and user fee, taxpayers can self-certify their eligibility and implement the change. This streamlined path applies to a wide array of common changes for correcting an improper method. The process is not a loophole but a regulated administrative pathway designed for efficiency.

Eligibility for an Automatic Accounting Method Change

To use the automatic change procedure, a taxpayer must meet specific criteria. A primary restriction is that a taxpayer generally cannot be under an IRS examination for the year of change. If the IRS has already contacted a taxpayer about an examination, their ability to file for an automatic change may be limited, particularly if the method in question is already an issue in the audit. This rule prevents taxpayers from preemptively fixing an accounting method issue only after it has been flagged by the IRS.

The scope of permissible changes is detailed in the current revenue procedures. Common examples of automatic changes include:

• Switching from the cash basis of accounting to the accrual basis
• Altering depreciation methods for tangible assets
• Adopting specific inventory valuation rules
• Changing the accounting for advance payments for goods and services
• Changing the treatment of software development costs

Each permissible change corresponds to a specific section in the IRS’s list of automatic changes. Not all accounting method changes qualify for the automatic procedure. Certain complex changes are excluded and require filing for non-automatic consent. For instance, some changes related to cost capitalization methods for inventory require this more formal approval from the IRS National Office. This alternative process involves submitting Form 3115, paying a user fee, and does not guarantee approval.

Preparing Form 3115 and the Section 481(a) Adjustment

The core of the automatic change process is the accurate completion of Form 3115, Application for Change in Accounting Method, which is available on the IRS website. This form requires detailed information, including the taxpayer’s name, identification number, the dates of the year of change, and the designated automatic accounting method change number. The filer must provide a clear description of both the present accounting method being changed and the proposed new method.

A component of Form 3115 is the calculation of the Section 481(a) adjustment. This adjustment represents the cumulative financial difference between the old and new accounting methods, calculated as of the first day 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 transition. This calculation requires a thorough review of the taxpayer’s books and records from previous years.

For example, consider a business changing from the cash method to the accrual method. At the beginning of the year of change, it has $50,000 in accounts receivable and $15,000 in accounts payable. Under the cash method, neither of these amounts would have been recognized. The Section 481(a) adjustment would be a positive $35,000 ($50,000 of unrecognized income less $15,000 of unrecognized expenses). This amount represents the net income that was deferred under the old method and must be accounted for as part of the change.

The Filing Procedure

Once Form 3115 is completed and the Section 481(a) adjustment is calculated, the filing process is straightforward. The procedure involves a two-part submission to ensure the IRS is properly notified of the change. Failure to adhere to these steps can invalidate the change, potentially leading to penalties.

The first step is to attach the original, signed Form 3115 to the taxpayer’s federal income tax return for the year of the change. This return must be filed by its due date, including any extensions. For example, if a calendar-year corporation implements a change for the 2024 tax year, the Form 3115 must be attached to its 2024 tax return filed in 2025.

The second step requires the taxpayer to file a separate, signed copy of the same Form 3115. This copy must be mailed to the IRS national office at the address specified in the most current Form 3115 instructions. The deadline for filing this copy is 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.

Post-Filing Tax Treatment and Considerations

After successfully filing Form 3115, the tax treatment of the Section 481(a) adjustment becomes a primary consideration. The rules for recognizing this adjustment in taxable income differ based on whether it is positive or negative. A positive adjustment, which increases taxable income, is generally recognized over a four-year period, starting with the year of the change. This spreads the tax impact over time, preventing a large, immediate tax burden.

In contrast, a negative Section 481(a) adjustment, which decreases taxable income, is typically recognized in its entirety in the year of the change. This provides an immediate tax benefit by allowing a full deduction in the year the new method is adopted. This favorable treatment encourages taxpayers to voluntarily correct improper accounting methods that may have previously overstated their taxable income.

A significant benefit of properly filing for an automatic accounting method change is receiving audit protection. This means the IRS is generally barred from requiring the taxpayer to change the same method for a tax year prior to the year of change. This protection provides certainty and prevents the IRS from imposing penalties on the same issue for past years.

This protection is contingent on a valid and timely filing. If the Form 3115 is filed incorrectly or late, the audit protection may be lost. Careful adherence to the procedural requirements is not just about implementing the change but also about securing this safeguard against prior-year examinations.