Businesses have significant flexibility in adopting accounting methods for tax purposes. This flexibility relates not only to “overall” accounting methods of general application, such as the cash and accrual methods, but also to accounting for specific items of revenue and expense. However, once an accounting method is adopted, whether an overall method or one that relates only to specific items, the taxpayer generally is not permitted to change that method, except with the consent of the Internal Revenue Service (see Internal Revenue Code (Code) §446(e) and Reg. §1.446-1(e)(2)(ii)(a)).
In Thrasys v. Commissioner (T.C. Memo 2018-199), a recent Tax Court decision, the government sought summary judgment that the corporate taxpayer could not use the “deferral method” of accounting for one large advance payment that the taxpayer received during the year in issue. The taxpayer had permissibly adopted the deferral method several years earlier, but had then accounted for advance payments received in one interim year in a manner inconsistent with the deferral method, and had also used an inconsistent method on its tax return for the year in issue, as originally filed. The taxpayer never obtained the IRS’s permission to change from the deferral method to either inconsistent method. Nevertheless, the government’s position in Thrasys was that the taxpayer’s impermissible divergences from the deferral method precluded the corporation from shifting back to the deferral method for the advance payment in the year at issue without IRS consent.
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