Can a taxpayer correct missed depreciation on a rental property without filing Form 3115?
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A taxpayer’s ability to correct missed depreciation on a rental property without filing Form 3115 depends on the specific facts and the type of error involved. The key distinction is whether the correction is a change in method of accounting or simply a correction of a mathematical or posting error.
1. Change in Method of Accounting vs. Correction of Error
- Change in Method of Accounting: If the taxpayer has consistently used an incorrect method of depreciation (for example, using the wrong recovery period, method, or convention, or failing to claim depreciation at all for two or more consecutive years), this is considered an impermissible method of accounting. Correcting this requires the taxpayer to obtain the consent of the Commissioner, which is generally done by filing Form 3115, Application for Change in Accounting Method, and making a section 481(a) adjustment to prevent duplication or omission of income or deductions.
- Correction of Mathematical or Posting Error: If the missed depreciation is due to a simple mathematical or posting error (for example, a one-time mistake in calculation or data entry), this is not considered a change in method of accounting. In such cases, the taxpayer may correct the error by filing an amended return for the year in which the error occurred, provided the statute of limitations for that year is still open.
2. IRS Guidance and Procedures
- IRS Revenue Procedure 2015-13 and the Instructions for Form 3115 make clear that a change in the method of accounting for depreciation (such as not claiming depreciation or using an incorrect method) requires the taxpayer to file Form 3115 to obtain the Commissioner’s consent, unless specifically authorized by statute or other guidance. This is true even if the taxpayer’s new method is permissible or clearly reflects income.
- Amended Returns: The IRS generally does not allow a taxpayer to correct an impermissible method of accounting for depreciation by filing an amended return for prior years. Instead, the proper procedure is to file Form 3115 and make a section 481(a) adjustment in the year of change.
- Exception for Mathematical or Posting Errors: If the missed depreciation is due to a mathematical or posting error, the taxpayer may file an amended return for the affected year(s) to correct the error, as this is not considered a change in method of accounting.
3. Practical Application
- If a taxpayer failed to claim depreciation on a rental property for one or more years due to oversight or misunderstanding (not just a one-time error), this is generally treated as an impermissible method of accounting. The taxpayer must file Form 3115 to change to a permissible method and claim a section 481(a) adjustment for the missed depreciation.
- If the taxpayer simply made a one-time calculation or data entry error, and the statute of limitations is still open, the taxpayer may file an amended return for that year to correct the error.
4. Summary Table:
5. Conclusion
In most cases where a taxpayer has consistently failed to claim depreciation on a rental property, the IRS requires correction through a change in accounting method using Form 3115, not by filing amended returns. Only if the missed depreciation is due to a mathematical or posting error (not a method issue) can the taxpayer correct it with an amended return, and only if the statute of limitations is open.
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