C&M Company is an accrual basis taxpayer with a December 31 year end. C&M is a professional services business specializing in providing haircuts for children in a kid friendly mobile arcade. The Company is a C corporation and has been in existence for 8 years. There are no subsidiaries. The CFO received a phone call on April 16, 2022, followed by a letter dated May 15, 2022, that the Company had been selected for IRS examination. Due to delays caused by COVID, the only item that the agent has requested so far is a copy of the trial balance for the tax year in question (2019)

The issue was discovered by the company in February 2023 when it was computing the amounts paid within 2.5 months for purposes of their accrued vacation deduction. The reports used each year to determine the 2.5-month payments which would be deducted for tax purposes were incorrect. The reports were run using total wages paid and not only vacation wages paid. For example, if John Doe received $1,250 of wages paid between January 1 and March 15 (consisting of $1,000 of regular wages plus $250 of vacation pay) the full $1,250 was showing on the report versus only the vacation amounts of $250.

RESPONSE: Is the issue a method change, an error, or a permissible method? If an error, or a permissible method, please explain why. If the item is a method change: What type of method change is it (auto vs. manual)? If the change is automatic, what are the possible Designated Change Numbers (DCN)? When would the company want to file the change and why? Factors to consider include: is the company under IRS exam; audit protection; if applicable, spread period for 481(a) adjustment.