Form 1128 Guide: Application to Change or Retain Tax Year

Introduction – What is Form 1128?

Form 1128, titled Application To Adopt, Change, or Retain a Tax Year, is an official administrative form provided by the Internal Revenue Service (IRS). It allows taxpayers to request formal IRS approval to establish, alter, or keep their annual accounting tax year.

The IRS governs Form 1128 to ensure that taxpayers maintain consistent accounting periods. Whether a corporation wants to switch from a calendar year to a fiscal year or a partnership needs to retain its existing reporting schedule, Form 1128 provides the regulatory bridge to make that transition legally binding.

Purpose of the Form

A tax year is the annual accounting period a taxpayer uses to keep records and report income and expenses. Most individuals and businesses operate on a calendar tax year (January 1 through December 31), but many businesses operate on a fiscal tax year (ending on the last day of any month other than December) or a 52-53-week tax year.

Form 1128 solves several administrative and regulatory needs:

• It establishes a formal request process to align a company’s tax year with its natural operational business cycle.
• It prevents improper tax deferral or tax avoidance that could occur if entities freely changed reporting periods without oversight.
• It outlines the required short tax period created during the transition between an old tax year and a new tax year.

Who Needs to File This Form

Form 1128 is used by a wide variety of business structures and tax entities. You must file Form 1128 if you are:

• A C corporation, S corporation, partnership, or Limited Liability Company (LLC) requesting to change its current tax year-end date.
• A Personal Service Corporation (PSC) or tax-exempt organization seeking to modify its accounting period.
• A newly formed entity seeking to adopt a fiscal tax year that requires advance IRS approval.
• An estate, trust, or individual taxpayer seeking to switch from a calendar year to a fiscal tax year.

Who Is Exempt / Not Required to File

Certain taxpayers can adopt or change their tax year without submitting Form 1128. Exemptions include:

• New Businesses Adopting First Tax Year: Newly formed corporations or sole proprietorships adopting a calendar year or a permissible first fiscal year on their initial tax return.
• Subsidiary Corporations Joining a Consolidated Group: A subsidiary changing its tax year to align with its parent company’s tax year under Treasury regulations.
• Entities Meeting Special Statutory Exceptions: Partnerships or S corporations adopting a “required tax year” mandated by ownership rules without requesting a non-conforming year.

When to File

The filing deadline for Form 1128 depends on whether your request qualifies for automatic approval or requires an advance ruling request from the IRS.

• Automatic Approval Requests: Must be filed by the due date (including extensions) of the tax return for the required short period created by the change.
• Ruling Requests (Non-Automatic): Must be filed on or before the due date (excluding extensions) of the tax return for the short period.
• Short Period Concept: The short period begins on the day after the old tax year ends and ends on the day before the new tax year begins.

Where and How to File

Form 1128 is a paper application. The submission location depends on the type of approval requested:

For automatic approval requests, file Form 1128 by attaching it to your short-period tax return or sending it to the designated IRS service center. For non-automatic ruling requests, mail the completed application directly to the IRS National Office in Washington, D.C., along with the required IRS user fee payment as per instructions.

Step-by-Step Instructions to Fill the Form

Form 1128 is divided into four main parts designed to evaluate your business justification and entity classification.

Form 1128 Section Overview

Form Section	Section Title	Required Information & Instructions
Part I	General Information	Enter taxpayer legal name, EIN or SSN, address, entity type, present tax year, requested tax year, and short-period dates.
Part II	Automatic Approval Request	Complete if relying on automatic revenue procedures. Indicate the specific IRS revenue procedure that grants automatic relief.
Part III	Ruling Request	Complete if advance IRS approval is needed. Provide a detailed business purpose statement and 36-month gross receipts data for the “natural business year” test.
Part IV	Entity-Specific Information	Provide specialized details required for partnerships, S corporations, PSCs, tax-exempt organizations, or foreign corporations.

Required Documents/Information Needed Before Filling

Assemble the following financial and legal information before preparing Form 1128:

• Financial Statements: Gross receipts and inventory data for the prior 36 months to verify a “natural business year” if filing a ruling request.
• Entity Identification Details: Employer Identification Number (EIN), principal business activity code, and ownership percentage records.
• Proof of User Fee Payment: Confirmation of user fee payment (paid via Pay.gov or Form 8718) if submitting a non-automatic ruling request.
• Written Business Purpose Explanation: A detailed narrative explaining the operational necessity for changing accounting periods.

Common Mistakes to Avoid

Errors on Form 1128 can result in immediate rejection or processing delays. Avoid these common mistakes:

• Forgetting the User Fee: Submitting a non-automatic ruling request without paying the required IRS user fee. Automatic approval requests do not require a user fee.
• Failing to Establish a Natural Business Year: Requesting a fiscal year-end without providing 36 months of gross receipts data showing that at least 25% of annual revenue occurs in the final two months of the requested period.
• Missed Filing Deadlines: Submitting a ruling request after the due date of the short-period return. Late applications require Section 9100 relief requests.
• Omitting the Short-Period Return: Failing to file a separate tax return for the short transition period after receiving tax year approval.

Penalties for Non-Filing or Errors

If a business changes its tax year without receiving IRS approval or filing Form 1128, the IRS will reject returns filed under the unapproved tax year.

The company will be forced to recalculate its income under its original tax year, which can result in failure-to-file penalties, late-payment interest, and administrative fines for invalid tax returns.

Related Forms or Schedules

Taxpayers changing or retaining a tax year frequently interact with related IRS forms:

• Form 1120 (U.S. Corporation Income Tax Return)
• Form 1120-S (U.S. Income Tax Return for an S Corporation)
• Form 1065 (U.S. Return of Partnership Income)
• Form 8716 (Election To Have a Tax Year Other Than a Required Tax Year)
• Form 2553 (Election by a Small Business Corporation)
• Form 8718 (User Fee for Employee Plan Determination, Adoption, or Change Request)

Frequently Asked Questions

What is a “short period” when changing tax years?

A short period is an accounting period of less than 12 months that occurs when transitioning from an old tax year to a new tax year. A separate short-period tax return must be filed to bridge the gap.

Is there an IRS fee to file Form 1128?

If your application qualifies for automatic approval under Part II, there is no IRS user fee. If your request requires a ruling request under Part III, you must pay an IRS user fee.

What is the 25% gross receipts test for a natural business year?

To qualify for a natural business year, an entity must show that 25% or more of its gross receipts for a 12-month period are earned in the last 2 months of the requested fiscal year for 3 consecutive years.

Can an individual change from a calendar year to a fiscal year?

Yes, but the IRS rarely grants approval to individual taxpayers unless they can prove an extraordinary business purpose and maintain formal financial accounting books.

What happens if the IRS denies my Form 1128 application?

If your application is denied, you must continue reporting income and expenses using your current, approved tax year. Any returns filed under the requested tax year must be amended.

Can I e-file Form 1128?

No. Form 1128 is a paper form that must be mailed to the IRS National Office for ruling requests or attached to the short-period return for automatic approvals.

Conclusion – Key Takeaways

Form 1128 is the official mechanism for changing or retaining a tax accounting year. Key takeaways include:

• Used by corporations, partnerships, trusts, and individuals to adopt, change, or retain a tax year.
• Offers two pathways: simplified Automatic Approval or advance Ruling Requests.
• Ruling requests require paying an IRS user fee and proving a valid business purpose.
• Requires filing a short-period tax return for the transition months.
• Unapproved tax year changes can render tax returns invalid and trigger IRS penalties.