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Initial impressions about Rev. Proc. 2019-10, computing insurance company reserves

Initial impressions about Rev. Proc. 2019-10

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).


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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

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.

  • When a taxpayer’s reserves are increased in the tax year (the year of change) as a result in a change of basis for determining the reserves, any adjustment under section 481 because of the change in method of accounting under section 807(f) will be accounted for in the year of change. For example, a taxpayer whose reserves would have been $105 under an old basis but are now $109 under a new basis will account for the $4 increase to the reserves as a $4 deduction in the year of change.
  • When a taxpayer’s reserves are decreased in the year of change as a result in a change of basis for determining the reserves, any adjustment under section 481 will be accounted for over four years, beginning with the year of change. For example, a taxpayer whose reserves would have been $105 under an old basis but are now $101 under a new basis will account for the $4 decrease to the reserves as a $1 increase to income in the year of change and in each of the next three years.

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:

  • Any changes to reserves under prior law section 807(f) in tax years beginning before January 1, 2018, must be continue to use a 10-year spread.
  • Any changes to reserves due to the transitional rule for section 807(d) must continue to be accounted for over eight years (i.e., the pre-TCJA closing balance compared to the post-TCJA closing balance). To the extent any changes in basis are required under prior law section 807(f), such changes are to be included in the pre-TCJA closing balance.
  • Any changes to reserves in subsequent years must be taken into account as change in method of accounting.

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.

KPMG observation

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.


For more information, contact a KPMG tax professional:

Sheryl Flum | +1 (202) 533-3394 |

Fred Campbell-Mohn | +1 (212) 954-8316 |

William Olver | +1 (617) 988-1642 |

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