IRS tax disputes involving loss reserves
In recent years, the IRS increasingly has challenged the deductibility of property & casualty (P&C) loss reserves. With three credentialed actuaries now on its staff, the IRS has sharpened its focus to challenge not only margins, but also the reasonability of the assumptions used in developing actuarial estimates of unpaid loss. The accounting basis for IRS reserve challenges also has evolved -- Statement of Statutory Accounting Principles (SSAP) No. 101 replaced SSAP No. 10R and SSAP No. 10 -- increasing the likelihood that the IRS will find the insurer's tax position "more likely than not" to be unsustainable and require the insurer to establish a tax loss contingency.
PwC actuaries have helped many insurers navigate the uncertainties associated with IRS tax exams and procedures related to mandated reserve adjustments. We help insurers prepare documentation that supports carried reserve levels, respond to a document request by the IRS, and proactively mitigate risk areas before an IRS challenge.
- The IRS may target for tax examination insurers that report high levels of reserve redundancy.
- The IRS will demand an insurer pay back taxes if it determines that historical reserves exceeded a reasonable level.
- Because the IRS can examine any open tax year (generally the last three fiscal years), an insurer may have difficulty supporting historical reserve levels if sufficient documentation was not produced at the time the reserves were established.
- Since SSAP No. 101 became the relevant guidance for IRS exams (beginning January 1, 2012), an insurer may have to recognize a tax loss contingency when faced with an IRS challenge today even though previous standards did not require such recognition.
For additional information on the IRS's perspective on margins and reserve levels related to tax loss contingencies, see the IRS Coordinated Issues paper “Margins and Other Unsubstantiated Additions to Insurance Company Reserves for Unpaid Losses and Claims” at http://www.irs.gov/Businesses/Margins-and-Other-Unsubstantiated-Additions-to-Insurance-Company-Reserves-for-Unpaid-Losses-and-Claims-%E2%80%93-11-18-2009..
How we can help
- We provide strategic guidance to insurers throughout an IRS exam process, from document request to response and negotiation. Strategy is particularly important in the case of potentially large adjustments.
- We assist insurers in "getting their reserve house in order" by identifying and mitigating potential issues before an IRS exam.
- We help insurers determine a quantification approach and proper documentation for historical reserve levels under SSAP No. 101 definitions.
- With more stringent IRS challenges of historical reserve levels in addition to margins, we can provide an objective assessment of IRS arguments.
- Objective, independent assessment of reserve levels, including assessment of the IRS’ position.
- Insurer documentation review and recommendation of leading practices related to IRS tax reviews.
- Expert testimony for an insurer in tax court proceedings brought by the IRS.
- Recommendation of leading practices for proactively setting reserves with documentation to withstand IRS tax challenges.
- Retroactive preparation of documentation supporting historical reserves under current accounting standards, e.g. SSAP No. 101, for establishing tax loss contingencies before an IRS request/exam.
- IRS exam guidance, from preparation and navigation to establishing a strategy for implementing IRS recommendations.
- Identify and mitigate potential areas that may draw highly focused IRS attention before an IRS document request.