Question

What incentives of the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?

Answer 1

Change in accounting method. A change in an entity's accounting method is a change in its overall plan of accounting for gross income or deductions (cash or accrual methods), or a change in the treatment of a material item. A material item involves the proper timing of when to include that item in income or if the item can be taken as a deduction. If a practice does not permanently affect a taxpayer's lifetime income but does affect the taxable year in which income is reported or a deduction taken, the practice involves timing and is considered a method of accounting.

An entity generally does not adopt an accounting method without consistent treatment—the treatment of a material item in the same way for purposes of determining gross income or deductions in two or more consecutively filed tax returns. If a taxpayer treats an item properly in the first return that reflects the item, however, it is considered to have adopted a method of accounting. Corrections of mathematical or posting errors or errors in the computation of tax liability are not considered changes in accounting method.