IRS guidance · 2021
IRM 4.11.6, Examining Officers Guide: Depreciation Method Changes
IRM 4.11.6 — Examining Officers Guide: Changes in Accounting Methods
IRS internal revenue manual
Audio summary
A short audio walkthrough of this rule: what it says and why it matters for your study.
What it holds
IRM 4.11.6 governs how examiners review depreciation method changes under Sections 167, 168, and 197. A retroactive cost segregation study applied to prior years without a Form 3115 is an impermissible method change. Voluntary changes use the automatic procedures in Revenue Procedure 2015-13 and Form 3115.
Why it matters for your study: A look-back study that catches up depreciation from prior years must be reported on Form 3115, not an amended return. IRM 4.11.6 is the examiner's reference for checking whether that was done correctly. Filing Form 3115 properly is what makes the look-back catch-up deduction legitimate.
Where this comes from
When a taxpayer files a cost segregation study for property that was placed in service in a prior year, they are changing how they have been depreciating that property. That is a change in accounting method under Section 446(e).
IRS Internal Revenue Manual 4.11.6 is the guide IRS examiners use when reviewing depreciation method changes during an audit. Chapter 6 of the Cost Segregation Audit Techniques Guide, Publication 5653, references it directly.
What it says
The manual distinguishes voluntary method changes from examiner-initiated changes. Voluntary changes, including those triggered by a cost segregation look-back study, use the automatic consent procedures in Revenue Procedure 2015-13 and are reported on Form 3115. The IRS does not need to pre-approve these; the taxpayer files the form and takes the adjustment.
Form 3115 includes a Section 481(a) adjustment. That adjustment is the total difference between the depreciation the taxpayer has taken and the depreciation they would have taken if the study had been in place from the start. The full catch-up amount can generally be deducted in the year the Form 3115 is filed, not spread back over prior years.
A retroactive study applied without a Form 3115 is an impermissible retroactive method change. That is what IRM 4.11.6 flags when an examiner looks at the return.
How it shows up in a study
A look-back study for property placed in service in prior years always includes a Form 3115 filing. The study identifies the components that should have been depreciated faster. The Form 3115 reports the method change and calculates the Section 481(a) adjustment. The catch-up deduction appears on the tax return in the year of filing.
The legal analysis section of your report cites IRM 4.11.6 and Revenue Procedure 2015-13 to show that the method change was done through the correct automatic procedures. That forecloses any challenge based on the method-change mechanics.
What it does not mean
Filing Form 3115 correctly handles the method-change side of a look-back study. It does not resolve questions about whether the underlying classifications are correct.
An examiner who accepts the Form 3115 can still challenge whether a specific component should have been classified as 5-year or 7-year property, or whether it should stay in the 39-year class. The Form 3115 procedure and the classification analysis are two separate issues, and a study needs to be defensible on both.
Primary source
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- Category
- Methodology & procedure
- Applies to
- All property types
- Status
- Vetted
This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.