In Private Letter Ruling (PLR) 202348007,[1] the IRS denied a taxpayer’s petition for an extension of time to submit a request for a change in accounting method.

Facts of the Case and How Things Went Wrong

The letter ruling outlines the fundamental circumstances underlying the request in the following manner:

Taxpayer is an S corporation. CPA prepares Taxpayer's federal income tax returns. Taxpayer computes taxable income on a calendar year basis using an overall accrual method of accounting. In computing taxable income, Taxpayer also uses methods of accounting under §§263A and 472 of the Internal Revenue Code.

For the Year taxable year, Taxpayer decided to change its accounting method for §§263A and 472. It also decided that the changes could be implemented via the automatic change administrative procedures. Given this decision, Taxpayer was to have filed two originals and two copies of Forms 3115 no later than when it filed its federal income tax return for Year.[2]

Although the taxpayer intended to file an automatic change in accounting method request concurrently with their tax return, several unforeseen issues arose. Consequently, neither Form 3115 nor the tax return were filed as planned.

Taxpayer failed to timely file its federal income tax return for Year and failed to timely file both the originals and signed duplicate copies of the two Forms 3115. This failure to timely file Taxpayer’s tax return and the required Forms 3115 was due to various mistakes. Taxpayer failed to return to CPA a Form 8879, IRS e-file Signature Authorization. Because of this failure, CPA’s software tracking system failed to update and CPA was not aware of the tax filing dates for Taxpayer. Additionally, a manager of CPA, who was integrally involved with Taxpayer’s tax filings, left the employ of CPA before the due date of Taxpayer’s Year federal income tax return. The remaining CPA staff assumed that the exiting manager had fulfilled Taxpayer’s tax obligations for Year. Lastly, CPA and Taxpayer were both dealing with significant changes to their work practices and policies caused by the COVID emergency, including working remotely.[3]

Although the taxpayer ultimately identified the oversight, their application for an extension of time to seek permission for changing their accounting methods was delayed and not submitted until almost a year later.

Taxpayer discovered its failure to file the Year federal income tax return and the Forms 3115 on Date1, at which time Taxpayer filed the return and Forms 3115. Waiting almost a year, on Date2, Taxpayer submitted this request for an extension of time to file the originals and signed duplicate copies of the two Forms 3115.[4]

Standards for Granting Late Election Relief for Regulatory Elections

The Private Letter Ruling (PLR) delineates the criteria required for approving the taxpayer’s request for late election relief. To qualify for this relief, the taxpayer must satisfy two essential conditions:

Section 301.9100-3(a) provides that requests for an extension of time subject to §301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith and that the granting of relief will not prejudice the interests of the Government.[5]

In this case, the IRS was particularly focused on the second criterion—determining whether granting relief would adversely affect the government’s interests. The PLR elaborates on the specific assessment used by the agency to make this determination:

Section 301.9100-3(c)(2) imposes special rules for accounting method regulatory elections. These rules provide that the interests of the Government are deemed to be prejudiced when the regulatory election concerns accounting methods unless there are unusual and compelling circumstances.

What are unusual and compelling circumstances must be decided on a case-by-case basis in light of all applicable facts and circumstances. T.D. 8742, 1998-1 C.B. 388 (February 2, 1998). For example, if the missed regulatory election relates to a nonrecurring transaction, this fact would be considered in determining whether there are unusual and compelling circumstances. Id.[6]

The Agency’s Decision

The IRS concluded that the taxpayer had not adequately shown the presence of unusual and compelling circumstances in this instance:

While the Commissioner has discretion to grant an extension of time under the rules set forth in §§301.9100-2 and 301.9100-3 to make certain regulatory elections, the Commissioner must weigh the extension requested with “the policy of promoting efficient tax administration.” T.D. 8742. Balancing Taxpayer’s desire to correct its mistake with the need to provide “limited time periods” to perfect accounting methods and considering why Taxpayer’s mistake occurred, the Commissioner concludes that Taxpayer has failed to show unusual and compelling circumstances within the meaning of §301.9100-3(c)(2). Id. Accordingly, the Government’s interests are deemed prejudiced.[7]

While the PLR does not provide a lot of details of why the request was denied, a few factors would seem to work against the taxpayer’s request:

The fact the taxpayer waited so long to request a private letter ruling on the issue would not give a favorable impression absent some additional information on why the request was so tardy.
The taxpayer’s own failure to return the electronic filing signature document to the CPA firm in question also is not going to reflect favorably on the request for relief absent an explanation of how this oversight took place.
The CPA firm’s errors likely cut both ways. The fact that the firm admitted to certain failures normally helps a taxpayer in a case like this. But, in this case, the CPA firm’s failures seem primarily to be that the firm failed to notice that the taxpayer had not returned the electronic filing form, something that presumably the firm had instructed the client to do. Thus, there was no situation where the firm gave the taxpayer bad advice on a complex matter-the advice to sign the form and return it to the firm was apparently correct and presumably just not followed by the client.
Finally, while COVID-19 definitely disrupted many operations, given all of the other errors it would likely have required very specific and unique details related to how the COVID-19 changes led to the failure to get the return filed to make that seem something more than just an attempt to find an excuse. The IRS could easily reason that the vast majority of taxpayers, regardless of how they had to restructure their business due to COVID-19 restrictions, were able to timely file their returns.

[1] PLR 202348007, December 1, 2023, https://www.taxnotes.com/research/federal/irs-private-rulings/letter-rulings-technical-advice/irs-denies-extension-to-file-accounting-method-change-requests/7hlvj (retrieved December 1, 2023)

[2] PLR 202348007, December 1, 2023

[3] PLR 202348007, December 1, 2023

[4] PLR 202348007, December 1, 2023

[5] PLR 202348007, December 1, 2023

[6] PLR 202348007, December 1, 2023

[7] PLR 202348007, December 1, 2023