Form 3115: Simplified Overview On Changing Accounting Methods

A Complete Understanding About Form 3115

IRS Form 3115, titled “Application for Change in Accounting Method,” is a comprehensive form used by businesses, individuals, and other taxpayers to formally request the IRS’s approval to either change their current accounting method or correct an improper method being used.

This includes:

• Modifying your accounting method from cash basis (income recognized when received) to accrual basis (income recognized when earned), or vice versa.
• Modifying how you capitalize or expense costs (like prepaid expenses),
• Changing the inventory method or depreciation system,
• Implementing accounting method changes required under the Tax Cuts and Jobs Act (TCJA) provisions.

Filing Form 3115 ensures uniformity and compliance in how income and expenses are reported and that any tax impact of switching methods is handled in accordance with IRC Section 481(a).

Why To File IRS Form 3115?

IRS Form 3115, Application for Change in Accounting Method, is required whenever a taxpayer wants or needs to change how they recognize income or expenses for tax purposes. This form serves as a formal request to the IRS to approve the change and to ensure that the taxpayer remains in compliance with federal tax laws.

Filing Form 3115 is not optional when a change in accounting method occurs. It is legally required to maintain consistency, accuracy, and transparency in your tax reporting. Failing to file it properly can lead to IRS penalties, loss of deductions, or an unfavorable tax treatment.

Top Reasons to File Form 3115

1. To Adopt a Permissible Accounting Method

Many businesses start out using methods that are not compliant with IRS rules, either due to misunderstanding or lack of tax planning. IRS Form 3115 is used to transition to a permissible method, such as:

• Changing from an improper depreciation schedule to a correct one under MACRS,
• Correcting the treatment of prepaid expenses or start-up costs,
• Switching from capitalizing items that should be expensed (or vice versa).

2. To Change the Timing of Income or Deductions

Different accounting methods can accelerate or defer how and when income is recognized or deductions are taken. For example:

• Shifting from the cash basis (reporting income when received) to the accrual basis (reporting income when earned), or the reverse.
• Changing when revenue from long-term contracts is reported,
• Adjusting the treatment of bad debt reserves, prepaid rent, or deferred revenue.

Form 3115 is filed to notify the IRS of a change in a taxpayer’s accounting method, ensuring that the change is properly documented, compliant with IRS procedures, and accurately reflected in the taxpayer’s income for consistent and lawful tax reporting..

3. To Comply With IRS or Congressional Law Changes

Congress frequently passes tax laws that require or allow changes in accounting methods. For example:

• The Tax Cuts and Jobs Act (TCJA) required businesses to reevaluate how they capitalize and depreciate assets, recognize revenue, or deduct business interest.
• Changes under Rev. Proc. 2015-13 and Rev. Proc. 2018-31 simplified or updated procedures for requesting accounting method changes.

When the IRS publishes updated rules or mandates changes, affected taxpayers must file Form 3115 to demonstrate compliance.

4. To Gain Favorable Tax Treatment

Sometimes, taxpayers file Form 3115 voluntarily to opt into a method that reduces tax liability, improves cash flow, or aligns better with business operations. Examples include:

• Accelerating depreciation to take advantage of bonus depreciation or Section 179 deductions,
• Switching inventory methods to better reflect actual costs and avoid higher taxable income,
• Electing to capitalize R&D costs to defer deductions and match future revenue.

In such cases, Form 3115 is a strategic tool that can result in lower tax bills over time—if used correctly and lawfully.

5. To Correct Prior Errors or Inadvertent Methods

Some taxpayers realize that they have been using an incorrect method for years—either because they misunderstood the rules or applied them inconsistently. Filing Form 3115 allows for:

• Voluntary correction before an IRS audit occurs,
• Establishing a clean accounting slate,
• Preventing the disallowance of past deductions or income reclassification.

This proactive correction using Form 3115 is generally viewed more favorably than being forced to make changes during an IRS audit.

6. To Report a Section 481(a) Adjustment

Every accounting method change can affect how and when income or deductions from previous years are recognized for tax purposes. To prevent overstatement or understatement of taxable income, a Section 481(a) adjustment is required to account for the cumulative impact of the accounting method change on prior years.

Form 3115 is the official IRS mechanism for:

• Calculating and reporting this adjustment,
• Spreading the adjustment over multiple years (typically four),
• Documenting the impact of the method change in a transparent and structured manner.

Key IRS Concepts in Form 3115

IRS Form 3115, Application for Change in Accounting Method, is not merely a form—it reflects a complex web of regulatory concepts that must be carefully followed to ensure a valid and IRS-compliant change in accounting treatment. Below are the critical IRS concepts that underlie the use of Form 3115.

1. Accounting Method

An accounting method refers to the rules a taxpayer uses to determine when and how income and expenses are recognized for federal tax purposes. It is not just bookkeeping—it governs the timing of taxable income and deductions.

There are multiple types of accounting methods:

• Overall Method: Cash or Accrual basis (required to be consistent across the business unless exceptions apply).
• Specialized Methods: Apply to:
  • Inventory valuation (e.g., FIFO, LIFO, Specific Identification),
  • Depreciation or amortization (e.g., MACRS, Straight-line),
  • Capitalization vs. expense treatment (e.g., repairs vs. improvements).

Changing any of these methods requires IRS approval via Form 3115.

2. Method Change vs. Accounting Practice or Correction

The IRS distinguishes between:

• A change to your accounting method (which requires submitting Form 3115) and affects how you recognize income or deductions.
• A correction of an error or accounting practice (may require an amended return, not Form 3115).

To qualify as an accounting method change, the change must affect:

• The point at which income or expenses are recognized for tax purposes.
• A consistent and recurring item on the return (not a one-time event).

Examples of method changes:

• Cash to accrual basis
• FIFO to LIFO inventory method
• Incorrect depreciation correction (if consistently used across years)

Examples of corrections, not method changes:

• Fixing a single-year mistake (e.g., misposting one invoice),
• Amending a prior-year return due to a clerical error.

3. Automatic vs. Non-Automatic Changes

The IRS categorizes method changes into two main categories:

Automatic Changes

• No prior IRS approval needed.
• Covered under Revenue Procedure 2018-31 (and updated annually).
• Simplified filing process.
• Submit Form 3115 together with your timely filed federal income tax return, including any approved extensions from the IRS.
• You are also required to send a separate copy of Form 3115 to the IRS office in Ogden, Utah, in addition to filing it with your tax return, as part of the mandatory submission process.

Examples:

• Cash to accrual (if gross receipts exceed threshold),
• Correcting depreciation methods (e.g., straight-line to MACRS),
• Capitalization changes under §263A or §174.

Non-Automatic Changes

• Require advance approval from the IRS National Office.
• It must be filed no later than the due date (including extensions) of the federal tax return for the year in which the accounting method change is made.
• Requires detailed justification and often a user fee.
• Used when the change is complex or not covered by IRS automatic procedures.

Examples:

• Switching from FIFO to LIFO,
• Certain long-term contract method changes,
• Unique or taxpayer-specific method requests.

4. Section 481(a) Adjustment

One of the most important technical aspects of a method change is the Section 481(a) adjustment, which ensures that there is no duplication or omission of income or deductions when switching from one method to another.

What it Does:

• Adds to income if deductions were previously overstated or income understated.
• Subtracts from income if deductions were understated or income overstated.

Adjustment Period:

• If the Section 481(a) adjustment results in a positive income change greater than $50,000, most taxpayers are required to allocate the adjustment evenly over four tax years, rather than reporting the entire amount in a single year
• If the Section 481(a) adjustment is negative or under the IRS threshold (typically $50,000 or less), it is generally fully deductible in the year of change.

The Section 481(a) adjustment acts as a bridge between the old and new methods, smoothing the tax impact and aligning financial reporting.

5. Consistency Requirement

Taxpayers must use the same accounting method consistently year after year unless an authorized change is made using Form 3115. Inconsistent application (e.g., using accrual for some income and cash for others) may result in the IRS:

• Disallowing deductions,
• Recharacterizing income,
• Imposing penalties and interest.

Form 3115 enforces this consistency rule by requiring an explanation of:

• The existing method,
• The new method,
• The business purpose for the change.

6. Filing Deadlines and Dual Filing Requirement

For Automatic Changes:

• File Form 3115 with the original tax return (including extensions) for the year of change.
• Send a duplicate copy to:

Internal Revenue Service

1973 N Rulon White Blvd.

Ogden, UT 84404

Attn: Mail Stop 4917

For Non-Automatic Changes:

• Must file before the end of the tax year of change.
• Submit the application to the IRS National Office along with the applicable user fee, as outlined in the IRS revenue procedures.

Missing deadlines may invalidate the change, requiring you to wait until the next tax year or face audit consequences.

7. Designated Change Numbers (DCNs)

Each approved accounting method change is assigned a Designated Change Number by the IRS, listed in official revenue procedures (e.g., DCN 7 for cash to accrual). You must include this number on Form 3115 to:

• Identify the change type,
• Confirm eligibility for automatic treatment.

8. Narrative Explanation Requirement (Part III)

Form 3115 requires a detailed narrative explaining:

• The current method and how it’s applied,
• The proposed method and rationale,
• The legal authority (e.g., regulations, revenue procedures),
• Why the new method clearly reflects income.

The IRS uses this narrative to evaluate the legitimacy and necessity of the change. Vague or insufficient explanations may result in delays, rejections, or requests for additional information.

Summary Table: Key IRS Concepts in Form 3115

Concept	Description
Accounting Method	Set of rules for reporting income and expenses
Method Change	A change in the overall timing or accounting system used to recognize income and expenses, not merely the correction of an error
Automatic Change	Pre-approved changes with streamlined filing
Non-Automatic Change	Requires IRS consent, longer process, user fee
Section 481(a)	Adjustment that prevents double-counting or omission of income
Consistency Rule	Must use the same method unless properly changed
DCNs	IRS-assigned numbers for identifying method change types
Narrative Requirement	Clear, detailed justification for proposed change

Structure of IRS Form 3115

IRS Form 3115 is a multi-part, technical form used by individuals, partnerships, corporations, trusts, and estates to formally request a change in accounting method. The form provides the IRS with all necessary details to evaluate, approve, and record the requested change.

As of the current version (2024), the form is 8 pages long and contains five major parts, followed by schedules and signature fields. Here’s a detailed explanation of each section:

Header Section (Top of Page 1)

This initial section gathers taxpayer identification and filing context:

• Name of filer: The full legal name of the individual, business, or entity requesting the accounting method change as reported on federal tax filings.
• Identifying number: SSN for individuals or EIN for business entities.
• Address: Complete mailing address.
• Tax year of change: Beginning and ending dates of the tax year during which the accounting method change will take place.
• Type of change: Indicate whether the change is under the automatic or non-automatic IRS procedures.
• Type of filer: Select if the filer is an individual, corporation, partnership, S corporation, trust, estate, etc.

This section establishes who is filing and whether prior IRS approval is needed or already granted under an automatic change.

Part I – Information for All Filers

This section captures core facts about the filer’s business and the method change request.

Key Lines:

• Line 1a–b: Description of the applicant’s trade or business (e.g., manufacturing, real estate).
• Line 2a–c: Details on the present method of accounting and how it’s currently applied.
• Line 3a–c: Explanation of the proposed new method, how it will be implemented, and rationale.
• Line 4a–b: Is this an overall accounting method change or a change to a specific item (inventory, depreciation, etc.)?
• Line 5–6: Whether other method changes are being filed concurrently.
• Line 7–8: Determine whether the change qualifies under a Designated Automatic Accounting Method Change Number (DCN).
• Lines 9–13: Business relationships, group filings, IRS audit status, and prior accounting method changes.

This part paints a complete picture of the accounting situation before and after the change.

Part II – Information for Non-Automatic Change Filers Only

This part is exclusive to non-automatic filers who must obtain advance IRS consent.

Key Elements:

• Line 14–16: Details of previous accounting method change applications in the last five tax years.
• Line 17: State if a similar request has been denied in the past.
• Line 18–20: Prior year financial statements and IRS audit history.
• Line 21: Whether the applicant has submitted the required user fee (typically several thousand dollars).

This part allows the IRS to evaluate whether the change is redundant, previously denied, or has broader implications for tax compliance.

Part III – Description of the Change, Legal Authority, and Rationale

This is the most substantive section, requiring a written, detailed explanation of the method change.

Components:

• Current method: Describe how the method is used (e.g., cash basis – revenue recognized when received).
• Proposed method: Detailed explanation of the new method and how it will operate going forward (e.g., accrual basis – income recognized when earned).
• Rationale for change: Is the existing accounting method no longer compliant or appropriate? Does the new method better reflect income?
• Legal basis: Cite the Internal Revenue Code, Treasury Regulations, and IRS Revenue Procedures that support the change.
• Implementation: Explain how records will be kept and when the change will take effect.

This part should be technically precise and persuasive—it serves as the IRS’s primary tool for approval decisions.

Part IV – Section 481(a) Adjustment Calculation

Section 481(a) ensures that no income or deductions are lost or double-counted during the transition.

Key Lines:

• Line 25–27: Specify whether a Section 481(a) adjustment is necessary due to the change in accounting method, and provide the amount and details if applicable.
• Line 28–30: Provide:
  • The adjustment amount (positive or negative),
  • The calculation method,
  • The time period over which the adjustment will be taken into income (usually 1 year for negative, 4 years for positive adjustments >$50,000).
• Attach supporting calculations and workpapers.

This part quantifies the immediate tax impact of switching methods and ensures transition equity.

Part V – Designated Change Number (DCN) and Automatic Change Criteria

This section applies to automatic method changes only.

Key Details:

• DCN Entry: Provide the Designated Change Number from the IRS-provided list (e.g., DCN 7 for cash to accrual).
• Revenue Procedure Reference: Confirm that the change qualifies under the cited IRS procedures (e.g., Rev. Proc. 2018-31 and annual updates).
• Conditions Met: Certify that the taxpayer meets all eligibility rules for automatic treatment.

DCNs provide IRS agents a shortcut to identify and validate routine method changes.

Schedules and Supporting Attachments

These may differ based on the nature of the accounting method change and can include the following :

• Depreciation/amortization schedules showing the old and new methods.
• Inventory valuation summaries (FIFO, LIFO, specific identification).
• Gross receipts calculations (especially for §263A or small business exemptions).
• Copy of the detailed narrative (for Part III).
• Section 481(a) adjustment worksheets.

These attachments support the taxpayer’s representations with factual and numerical evidence.

Signature and Declaration

This concluding section affirms, under penalty of perjury, that all information provided is accurate, truthful, and complete to the best of the filer’s knowledge and belief.

• Signature of taxpayer or authorized representative
• Date
• Printed name and title (if applicable)
• Phone number and preparer details if filed by an agent or CPA

This is a sworn declaration under penalty of perjury and binds the taxpayer to the contents of the form.

Example: Form 3115 – Change from Cash to Accrual Method

Scenario: 1

ABC Consulting LLC is a partnership that previously reported income and expenses using the cash method of accounting. However, its average annual gross receipts exceeded $30 million over the past three years, requiring it to switch to the accrual method under §448(a)(3). They are filing under the automatic change procedures, and the change will take effect for the 2025 tax year.

Summary of Key Details

Element	Description
Taxpayer	ABC Consulting LLC
TIN	12-3456789
Tax Year	Calendar Year (Jan 1 – Dec 31, 2025)
Change Type	Accounting method: cash → accrual
Filing Basis	Automatic change
Designated Change Number (DCN)	DCN 7
Section 481(a) Adjustment	Positive $120,000 (income recognized earlier under accrual)
Adjustment Period	4 years (2025–2028)
Revenue Procedure	Rev. Proc. 2018-31 and 2023 update
Filer Type	Partnership (Form 1065)

Sample Narrative – Part III: Description of Change, Legal Authority, and Explanation

Line 1 – Current Accounting Method

ABC Consulting LLC currently uses the cash method of accounting for federal income tax purposes. Under this method, the partnership recognizes income when received and deducts expenses when paid.

Line 2 – Proposed Accounting Method

ABC Consulting LLC proposes to adopt the accrual method of accounting beginning with the tax year ending December 31, 2025. Under the accrual method, income will be recognized when earned (regardless of when received), and expenses will be deducted when incurred (regardless of when paid).

Line 3 – Reason for Change

The change is mandated under IRC §448(a)(3) because the partnership’s average annual gross receipts for the preceding three tax years surpassed the $30 million limit. As such, the taxpayer is no longer eligible to use the cash method. The proposed change will also provide a clearer reflection of income as required under Treas. Reg. §1.446-1(e)(2)(ii).

Line 4 – Legal Authority

This application is submitted under the automatic change procedures provided in Rev. Proc. 2018-31, as updated by Rev. Proc. 2023-24, DCN 7. The proposed change complies with all requirements for automatic consent, including timely filing with the taxpayer’s return and compliance with the general eligibility conditions in Section 5.01.

Line 5 – Implementation and Transition

ABC Consulting LLC will implement the accrual method for all income and deductions beginning January 1, 2025. A Section 481(a) adjustment of $120,000 has been computed and will be recognized evenly over four tax years (2025 through 2028) as required for positive adjustments under automatic procedures.

Section 481(a) Adjustment Summary (Part IV)

• Is a Section 481(a) adjustment required? Yes
• Amount of adjustment: $120,000 (positive)
• Reason: Accrual method recognizes receivables that were not previously included in income under the cash method.
• Adjustment Period: 4 years
  • 2025: $30,000
  • 2026: $30,000
  • 2027: $30,000
  • 2028: $30,000

Part V – DCN and Automatic Change Designation

• Designated Change Number (DCN): 7
• Automatic change under: Rev. Proc. 2018-31, Section 15.01(1)
• Filer certifies eligibility and compliance with the automatic procedures

Attachments

• Workpaper showing gross receipts computation for past 3 years
• Section 481(a) adjustment computation
• Copy of tax return (Form 1065) showing where the change will be reflected
• Signature and declaration by a managing partner

Scenario: 2

A tech startup has been improperly deducting R&D supplies instead of capitalizing.

• They wish to correct this and switch to a permissible method of capitalizing and amortizing R&D under Section 174.
• The change appears on the IRS’s list of automatic accounting method changes, making it eligible for streamlined approval procedures.
• They complete Form 3115 with:
  • Description of improper and proper method,
  • Applicable IRS guidance,
  • A negative 481(a) adjustment to deduct missed expenses.

They must attach Form 3115 to their timely filed tax return (including extensions) and also submit a duplicate copy to the IRS office in Ogden, Utah.

Frequently Asked Questions (FAQs)