RP 2015-20 – Not the Answer We Were Hoping For

Tax Return Preparers Must Understand Consequences of Not Filing the TPR 3115

The IRS released Revenue Procedure 2015-20 on Friday the 13th, February 13, 2015.  Note that the final tangible property regulations (TPRs) rules have not changed. RP 2015-20 only addresses the issues associated with the implementation of those TPRs for taxpayers that qualify under the new RP.  Below is a detailed summary of its new procedure rules and our thoughts and consequences on employing and not employing its method change procedures.

The problems with RP 2015-20 are the following. Taxpayers and their preparers employing RP 2015-20:

  1. Tend to think that this RP means that they do not have to do any of the TPR work. Note that the TPRs still apply to all applicable taxpayers. RP 2015-20 stands for the position that they can employ the TPRs as of transactions 1-1-14 and after, not the fact that the TPRs do not apply.
    1. While they will not have to “scrub” their depreciation schedules, but they still are going to have to:
      1. Determine their applicable units of property
      2. Install capitalization procedures so that 2014 and after expenditures are subject to the RABI tests and consequently properly categorized as either repairs and maintenance or those that require capitalization.
      3. As such the preparer and the taxpayer must understand and employ the:
        1. RABI criterion
        2. RMSH
        3. Proper class lives of its capitalized assets
    2. If the preparer and taxpayer need to do these TPR steps at a minimum they may just consider the advantages of filing the Form 3115s, even if those are filed with zeros for the 481(a)s.
  2. Will miss out on being able to deduct removal costs. If they file method #21, they can still obtain the ability to deduct removal costs, but that method must be filed using a Form 3115, even if filed in tax years beyond 2014.
  3. Will not be able to define their unit of property. They will “default” to what the IRS may define your unit of property.
    1. RP 2015-20, section 2.06 states the following: “While some small business taxpayers may choose to file a Form 3115 in order to retain a clear record of a change in method of accounting or to make permissible concurrent automatic changes on the same form, other small business taxpayers may prefer the administrative convenience of being able to comply with the final tangible property regulations in their first taxable year that begins on or after January 1, 2014, solely through the filing of a federal tax return.”
      1. Without a Form 3115 filing, the taxpayer does not have a “clear record of a change in method of accounting”.
    2. The advantages of the taxpayer defining its units of property for real estate? It is able to “set the stage” as to what it wishes its unit of properties to be and not what an agent may arbitrarily enforce for:
      1. Buildings:
        1. Based upon that unit of property definition, is able to consider the prior capitalization of carpeting or cabinets compared to the building and employ either the RABI rules or the RMSH
      2.  Land improvements:
        1. Gets to consider the prior capitalization of expenditures in comparison to its larger defined unit of property
      3. Landlords:
        1. Can measure its tenant improvements (TIs) against a large comparison and obtain more deductions for past, current and future TIs.
  4. Will not get audit protection for their transactions before 2014, which can be a very big deal.
      1. Can a taxpayer then get audit protection if it files Form 3115 without calculating any 481(a)s in those filed 3115s? I believe that the answer must be “yes”. If the taxpayer files a Form 3115 without calculating the proper 481(a)s the IRS will beable to dispute its 481(a)s but not its Form 3115 filing(s) that provide the audit protection.
      2. Recall the following statement from the IRS that supports this statement:  “Tax Notes Today reported that Andrew Keyso Jr., IRS Associate Chief Counsel (Income Tax and Accounting), stated on November 5, 2014 at the fall AICPA Tax Division meeting that the government likely will respect a taxpayer’s Form 3115, even though it might include a zero Section 481(a) adjustment that is incorrect, unless it is clear that the adjustment should have been much different than what was reported. He thought the error would have to be egregious to attract IRS attention.Tax practitioners had pointed out that some taxpayers do not want to pay the high costs associated with going through several years’ worth of records to calculate a precise Section 481(a) adjustment. The cost of that level of compliance could be more than the entire cost of preparing the returns. Scott Dinwiddie, Special Counsel, IRS Office of Associate Chief Counsel (Income Tax and Accounting), was quoted as saying at the Tax Division meeting that, barring a situation in which the taxpayer has taken aggressive positions in the past or has in no way applied a proper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s zero Section 481(a) adjustment now. Keyso added that the IRS is most interested in ensuring that taxpayers are applying the regulations correctly from now on.”
  5. Will not solve their impermissible depreciation methods without filing a #7.
  6. Cannot get the 2014 tax year prior year partial or separately stated asset dispositions (as it is prohibited from filing #196 and/or #205/206s).
  7. Will not be able to take advantage of the negative 481(a)s that TPR method filings generally provide for taxpayers with real estate.
  8. Will not be able to get a 4 year spread if the taxpayer has positive 481(a)s that show up from a TPR depreciation “scrub”.
  9. Will not be able to remove fully depreciated assets that never should have been capitalized under the criterion of the TPRs. When those related buildings or assets are sold, the taxpayer will incur recapture under 1245 or 1250 that it did not need to if the method filings had been done.

Finally, tax return preparers who do sign returns that employ the RP 2015-20 “default” instead of filing the 3115s need to protect themselves by obtaining written indemnifications from their clients. Imagine a taxpayer who finds out later that they missed the opportunity to obtain significant (to them) negative 481(a)s, or could have avoided audit adjustments from an IRS audit, or has increased tax due to recapture on an asset or business sale, and/or the other resultant issues described above.

Bottom line is this – if the taxpayer has reason to file the TPR 3115s it still should, and if not, the return preparer needs to protect himself or herself accordingly.

Copyright© 2015, Eric Wallace, LLC