IRS addresses life insurance reserves in final regulations and revenue ruling

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October 2020

Overview

Treasury and the IRS recently released final regulations under Section 807, addressing changes to the computation and reporting of life insurance reserves that resulted from the 2017 tax reform act (the Act). The regulations largely are consistent with those that were proposed on April 2, with changes that are responsive to most, but not all, public comments.

Together with the regulations, the IRS released Rev. Rul. 2020-19, updating prior guidance on changes in basis for computing life insurance reserves. The ruling addresses issues that arise as a result of more recent actuarial and tax developments.

The takeaway

On balance, the final regulations and revenue ruling are unsurprising and generally helpful. Both documents respond thoughtfully to public comments and, particularly regarding changes in basis, provide guidance the industry long has argued is needed.

There are no immediate changes to the mechanics for filing Forms 1220-L for 2019, which are due October 15. Insurers should remain alert, however, to at least three remaining areas of concern.

First, there likely will be future changes to the tax return filing process, including potential changes to the requirement to file returns electronically versus on paper, and a new requirement to provide annual statements in an electronic format. These changes should be monitored, as they will require updates to a company's tax compliance systems.

Second, the final regulations still provide no detail on reserve reporting requirements under the Act. Depending on the requirements the IRS ultimately imposes, those requirements potentially could impose a significant burden. This likewise will require monitoring.

Finally, the renewed level of attention to changes in basis for computing reserves under Section 807(f) and the requirement to file Form 3115 highlight the importance of being alert to changes in basis when preparing Forms 1120-L for 2019, and make communication between the actuarial and tax functions of a company even more important. There is more at stake than securing permission, since under the relevant IRS guidance a company may receive audit protection on an issue as well.

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Julie Goosman

Insurance Tax Leader, PwC US

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