28 August 2019 IRS gives insurance companies simplified procedures to change accounting method to comply with amended IRC Sections 807 and 848 In Revenue Procedure 2019-34, the IRS has provided — for one year only (the first tax year beginning after December 31, 2017) — simplified procedures under IRC Section 446 for an insurance company to obtain automatic consent to change its accounting method to comply with changes that the Tax Cuts and Jobs Act of 2017 (TCJA) made to IRC Sections 807, Rules for Certain Reserves, and 848, Capitalization of Policy Acquisition Expenses. The simplified procedures provided in Revenue Procedure 2019-34 generally are consistent with those provided in Revenue Procedure 2019-30 (see Tax Alert 2019-1547), which allow an insurance company to change its methods of accounting for discounting unpaid losses and expenses unpaid, estimated salvage recoverable and unearned premiums attributable to title insurance, to comply with IRC Section 846, as amended under the TCJA. Insurance companies must compute their life insurance reserves in accordance with IRC Section 807. The amount of life insurance reserves for a tax year ending on or before December 31, 2017 was based upon requirements in IRC Section 807(d), taking into account three major prescribed items — interest rates, mortality and morbidity tables, and reserving methodology. The life insurance reserve was computed for each contract and was capped at the amount of the statutory reserve; the net surrender value, if any, of a contract provided a floor. Changes made by the TCJA eliminated two of the three prescribed items (interest rate and mortality and morbidity tables), but otherwise retained the structure of IRC Section 807(d). Changes were made to how life insurance reserves are computed for variable insurance and annuity contracts as well as other technical changes. The changes to IRC Section 807(d) apply to the first tax year starting after December 31, 2017. Congress provided a transition rule for the first tax year beginning after December 31, 2017, which provides that the life insurance reserve for any contract at the end of the preceding tax year (generally December 31, 2017) is determined as if the changes made under the TCJA applied to that year. As part of this transition relief rule, an insurance company must take into account ratably over eight years the "TCJA Transition Adjustment." The TCJA Transition Adjustment is the difference between (1) the amount of life insurance reserves for any contract as of the close of the tax year preceding the first tax year that begins after December 31, 2017, computed using the modified TCJA method; and (2) the amount of these reserves computed using the pre-TCJA method. An insurance company must reserve certain amounts to enable the company to satisfy its insurance and annuity obligations if the obligations do not involve life, accident, or health contingencies. Changes made under the TCJA provide that, for tax years beginning after December 31, 2017, reserve amounts under IRC Section 807(c)(3) should be discounted at "the highest rate or rates permitted to be used to discount the obligations by the National Association of Insurance Commissioners as of the date the reserve is determined." The TCJA was silent with regard to how this change was to be reported. Policy acquisition expenses for a tax year, calculated as a percentage of net premiums on specified insurance contracts, must be capitalized and amortized over a defined period (IRC Section 848). For tax years beginning after December 31, 2017, changes made under the TCJA: (1) extend the general amortization period from 120 months to 180 months; (2) change the percentage of net premiums deemed to be specified policy acquisition expenses; and (3) require specified policy acquisition expenses that must be capitalized in tax years beginning before January 1, 2018 to continue to be amortized ratably over 120 months. A technical correction is needed for amounts capitalized in tax years beginning before January 1, 2018, to allow amounts subject to the 60-month amortization to be allowed to continue. The TCJA was silent with regard to taxpayer reporting for these changes to IRC Section 848. Revenue Procedure 2019-34 classifies the TCJA changes described previously as changes in accounting method. Under IRC Section 446(e) and Treas. Reg. Section 1.446-1, a taxpayer must obtain the IRS Commissioner's consent before changing a method of accounting for federal income tax purposes, typically by filing Form 3115. The current terms and conditions under which an insurance company may obtain consent to change its method of accounting by filing a Form 3115 are found in a series of revenue procedures (Revenue Procedure 2015-13, as clarified and modified by Revenue Procedures 2015-33, 2017-59 and 2019-1, and Revenue Procedure 2018-31). The IRS notes that Revenue Procedure 2019-34 now provides simplified procedures applicable to specific circumstances, including a waiver of the requirement to file Form 3115 if certain conditions are met by the taxpayer. The simplified procedures replace the requirements under Revenue Procedure 2015-13, as clarified and modified, and Revenue Procedure 2018-31 in those specific circumstances. Revenue Procedure 2019-34 generally applies, for the first tax year beginning after December 31, 2017, to any insurance company that changes its method(s) of accounting for:
To fall within the scope of Revenue Procedure 2019-34, an applicable insurance company must, for the first tax year beginning after December 31, 2017, compute and report the TCJA Transition Adjustments under IRC Section 807 as an IRC Section 481(a) adjustment. The adjustment period is eight tax years, beginning with the year of change. For IRC Section 807(c)(3) reserves, the IRC Section 481(a) adjustment is the difference between (i) the amount determined under IRC Section 807(c)(3) as of the close of the tax year preceding the first tax year beginning after December 31, 2017, determined using the appropriate rate of interest post-TCJA, and (ii) the amount determined using the appropriate rate of interest required pre-TCJA: Negative adjustments must be taken into account in the first tax year (generally calendar year 2018), while positive adjustments must be taken into account over a four-year period beginning in the first tax year (generally calendar year 2018). An alternative procedure allows a positive adjustment to be included in taxable income in its entirety in the year of change (generally calendar year 2018) For changes related to the capitalization and amortization of certain policy acquisition expenses to comply with TCJA modifications to IRC Section 848 for the first tax year beginning after December 31, 2017:
A taxpayer may rely on the new revenue procedure in changing its method of accounting if it (1) has a properly filed Form 3115 pending with the IRS National Office as of August 26, 2019, and (2) satisfies the requirements of Revenue Procedure 2019-34. The IRS automatically grants consent to any taxpayer that falls within the scope of Revenue Procedure 2019-34 to change the accounting method for: (1) life insurance reserves; (2) IRC Section 807(c)(3) reserves; and (3) amounts capitalized and amortized under IRC Section 848. Detailed terms and conditions for making a change in accounting method under Revenue Procedure 2019-34 are laid out in Section 6 of Revenue Procedure 2019-34. The requirement to file Form 3115 to make a change in accounting method is waived, as long as the taxpayer satisfies the terms and conditions set out in Section 6, properly reports the amount of any IRC Section 481(a) adjustment on its federal income tax return and satisfies the applicable terms and conditions of Revenue Procedure 2015-13. To meet the requirements under Revenue Procedure 2019-34, a taxpayer with a short tax year must take into account the IRC Section 481(a) adjustments previously described, as if the short tax year were a full 12-month year. No audit protection is provided for a change in method of computing life insurance reserves under Revenue Procedure 2019-34 to comply with the TCJA's amendments to IRC Section 807. However, audit protection is granted for changes in methods of accounting for discounting amounts under IRC Section 807(c)(3) or for capitalizing and amortizing specified policy acquisition expenses under IRC Section 848. This means the IRS will not require a taxpayer that makes a change in method of accounting for IRC Section 807(c)(3) reserves or the capitalization or amortization of certain policy acquisition expenses under IRC Section 848 to change its method of accounting for the same item for the tax years before the year of change. To benefit from this protection, taxpayers must comply with the provisions of Revenue Procedure 2019-34. Additionally, their method of accounting for the same item may not be an issue under consideration (under examination, before an Appeals office, or before a federal court) within the meaning of Section 3.08 of Revenue Procedure 2015-13, on 6 August 2019. The guidance provided by Revenue Procedure 2019-34 is helpful in removing any doubt regarding whether a Form 3115 is required and in laying out what IRC Section 481(a) adjustments are required. Further, the waiver of the requirement to file a Form 3115 reduces the administrative burden to taxpayers of complying with the amendments to IRC Sections 807 and 848. While audit protection is granted for changes to comply with the new rules for discounting amounts under IRC Section 807(c)(3) and for capitalizing and amortizing specified policy acquisition expenses under IRC Section 848, no audit protection is granted for changes in computing life insurance reserves made under Revenue Procedure 2019-34. Regardless of whether audit protection applies, the IRS can review the accuracy of an IRC Section 481(a) adjustment. Nonetheless, lingering questions remain regarding whether a statutory change that mandates changes to the treatment of an item, like reserves or deferred acquisition costs, should be treated as an IRC Section 481 adjustment at all, as failure to make the changes will result in a company's being noncompliant with the law. A strong argument can also be made that such changes constitute a change in facts and not a method change. This distinction may become important if the IRS finds in a future audit that the taxpayer did not satisfy all of the requirements of the Revenue Procedure.
Document ID: 2019-1548 | |||||||||||||
