The IRS yesterday released an advance version of Rev. Proc. 2019-10 that insurance companies may follow to obtain automatic consent to account for changes in computing their reserves as required by section 807(f), as amended by Pub. L. No. 115-97 (enacted December 22, 2017) and referred to as the “Tax Cuts and Jobs Act” (TCJA).
Read Rev. Proc. 2019-10 [PDF 47KB]
Section 807(f), as amended by the TCJA, requires an insurance company to treat any changes as a result of computing its reserves on a different basis in the current year compared to the previous year under the section 481 change in method of accounting rules. This new requirement is effective for tax years beginning after December 31, 2017.
Previously, an insurance company was required to account for any changes in the basis for computing its reserves by ratably including the change in income over 10 years (the 10-year spread).
Rev. Proc. 2019-10 modifies Rev. Proc. 2018-31 to address the TCJA amendment to section 807(f) and adds section 26.04 to the List of Automatic Changes.
A taxpayer that changes its basis for calculating its reserves and that must make a change in its method of accounting must file Form 3115, Application for Change in Accounting Method. Rev. Proc. 2019-10 details specific information that must be included on Form 3115 as a result of a method change under section 807(f).
A single Form 3115 is required for all basis changes made in a tax year. However, all basis changes made in a tax year are considered separate changes. The changes in basis of computing the reserve for each type of contract (life insurance, annuity, etc.) must be aggregated into a single section 481(a) adjustment. All basis adjustments must be separately identified on Form 3115. A single Form 3115 is to be filed for all changes in basis for all members of a consolidated group.
In order to make sure there are no duplications or omissions of the changes in reserves as a result of the TCJA, the following rules apply:
The eligibility requirements prohibiting a method change for the same item within five tax years do not apply to changes under section 26.04.
An automatic change under section 26.04 does not qualify for audit protection in the year of change or in any subsequent year. In other words, the IRS may require a taxpayer to change the basis for computing reserves if such basis does not constitute a permissible method of accounting, even if an automatic change was granted for the year of change.
Rev. Rul. 94-74 and Rev. Rul. 2002-6, which previously described situations when adjustments may be made to reserves without treating such adjustments as method changes (e.g., filing an amended return), are modified to the extent they were inconsistent with the required procedures to change a method of accounting of section 446.
The release of Rev. Proc. 2019-10 was much anticipated and is mainly in line with industry expectations. It provides a methodology for applying the updated section 807(f) provisions.
The revenue procedure does not discuss what qualifies as a change in basis for computing reserves. Since the post-TCJA federally prescribed reserve computation is based on statutory reserves, it is not clear whether a change in basis for computing statutory reserves would be subject to the new section 807(f) rules.
While it is helpful that all basis changes for a single year are aggregated by product line, it may open questions as to what constitutes any particular product line. Presumably, variable annuities would be separate from fixed annuities.
It is important to note the section 481(a) adjustment is included in the year of change, and is not deferred to the year subsequent to the year of change (as in the former section 807(f) rules).
Finally, because the revenue procedure is effective for only tax years beginning after December 31, 2017, taxpayers should be entitled to utilize previous procedures to make changes in pre-TCJA tax years (e.g., under Rev. Rul. 94-74 and Rev. Rul. 2002-6). Taxpayers need to be careful, however, to determine that such changes do not duplicate or omit changes in reserves. For example, a taxpayer may be required to amend its return to recalculate the transition amount under the TCJA.
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