Bankers were recently reminded by the FDIC that starting sometime this year they have to stop using an accounting method for tax purposes that the IRS considers improper for certain short-term consumer loans. The punchline is the IRS-preferred method gives bankers more time to hold onto their money.

Many small banks use the so-called "rule of 78s" to account for interest on self-amortizing installment loans of five years or less. The rule means the interest recognition is front-loaded and more tax is paid at the beginning of the year, compared to the constant yield method, preferred by the IRS. Although the taxpayer loses some of the value of money, the rule of 78s is an easier method of bookkeeping, and popular with smaller banks.

The IRS said in 1997 bankers should stop using the improper method of accounting, but did not specify when the change should take place. Late last year the agency said any banks which had not switched methods in 1997 would have to do it by the 1999 tax year. For banks on the calendar year, that meant redoing the bookkeeping starting last month, but there are some who may not begin until later this year.

Some accountants see the new rule as a blessing for small banks which will not have to worry about keeping two sets of books anymore–one for regulatory purposes, and one for taxes.

"It’s really kind of a relief," said John Ziegelbauer, senior manager in charge of coordinating financial institution tax at Grant Thornton.

Others are simply amused that the IRS is forcing bankers to keep their money longer.

"Taxpayers using the rule of 78s were leaving dollars on the table, but they continued doing it as a matter of simplicity. What’s interesting about this is the IRS is saying a method less favorable to taxpayers is less permissible. But the IRS is interested in purity in this case," said Marc Levy, a tax expert at Deloitte.