The IRS issued four new compliance Campaigns for the Large Business & International Division. Two of the campaigns center on the computation of life insurance reserves under IRC 807(d).
The first Campaign relates to the computation of life insurance reserves under the new methods provided in 807(d) as a result of the Tax Cuts and Jobs Act (TCJA). Generally speaking, the new method is to require the life insurance reserves to be the greater of net surrender value of the contract or 92.81% of the reserves required by the National Association of Insurance Commissioners (NAIC). Transition rules provided the change in method would be taken into account ratably over the eight succeeding taxable years.
The second Campaign concerns potential improper elections made under former section 807(d)(4)(A)(ii) and the interest rates applied to reserves under former tax law. The IRS concern is that taxpayers may incorrectly calculate their transition adjustments required under the TCJA if improper elections were filed. The IRS cites Chief Counsel Advice 201939003, which concluded that the election cannot be made on an amended return, nor on an originally filed return with respect to contracts issued five or more years prior to the original return.
The goal of both Campaigns is to examine the Forms 1120-L filed by life insurance companies for the 2017 and/or 2018 taxable years, and any related or subsequent tax years to understand how taxpayers implemented the change. These will be addressed as issue-based examinations.
Additionally, the IRS has issued final regulations on determining life insurance reserves. The final regulations adopt the proposed regulations issued in April with some amendments. Key take-aways from the regulations are:
- Definitions and limitations on adequacy reserves
- Asset adequacy reserves are defined to be any reserve established as an additional reserve that would otherwise be established as a result of the valuation requirements in the NAIC Valuation Manual, such as CRVM or CARVM and similar reserves.
- Asset adequacy reserves are not to be included in the computation of reserves under 807(d)(1), therefore are nondeductible.
- Specification that changes in the basis of reserve computations under 807(f) are changes in the method of accounting
- Rev. Rul. 2020-19 was also issued providing guidance on what constitutes a change in accounting related to reserves and includes 10 situational examples
