The Internal Revenue Service (IRS) recently released two revenue procedures that relate to the implementation of accounting method changes as a result of the revisions to Section 846 of the Internal Revenue Code of 1986, as amended by the Tax Cuts and Jobs Act (TCJA).1 Revenue Procedure 2019-30 provides simplified procedures for insurance companies seeking to change their methods of accounting for discounting unpaid losses and unpaid expenses. The revenue procedure also applies with respect to estimated salvage recoverable and unearned premiums attributable to title insurance under amended Section 846. Separately, Revenue Procedure 2019-31 prescribes revised unpaid loss discount factors for the 2018 accident year and earlier accident years for use by insurance companies in computing discounted unpaid losses under Section 846. The guidance is relevant both for property and casualty insurance companies and for life insurance companies.
Section 446(e) requires a taxpayer to obtain IRS consent to a change of accounting method. Consent is required so that the IRS is aware of changes being made. As a general rule, in order to change an accounting method, IRS Form 3115 (Application for Change in Accounting Method) is required for automatic as well as for non-automatic method changes. IRS consent is also required so that the IRS has the opportunity to confirm that appropriate Section 481(a) adjustments are being made to avoid the duplication or omission of income due to the change. Section 481(a) adjustments generally represent differences between amounts reported on a taxpayer’s federal income tax returns as a result of a change in method of accounting. When a Section 481(a) adjustment is positive (an addition to income), the adjustment generally is taken into account over four years.
A change of accounting method may be required for insurance companies to comply with amended Section 846 and the regulations thereunder, which were finalized effective June 17, 2019. Automatic consent is available for certain changes in method of accounting in accordance with IRS guidance. Revenue Procedure 2019-30 provides that guidance with respect to changes in method to comply with the amendments to Section 846. The IRS provided simplified procedures in this instance because the IRS recognized that the timing of the issuance of proposed and final regulations implementing amendments to Section 846 has posed unique challenges to taxpayers subject to the discounting rules.2 The simplified procedures are designed to reduce administrative and tax compliance burdens for taxpayers.
Revenue Procedure 2019-30 provides welcome simplifying guidance with respect to accounting method changes required to comply with the amendments to Section 846. Under a simplification to the ordinary rules for automatic changes, Revenue Procedure 2019-30 waives the usual requirement to file IRS Form 3115. Additionally, under a transition rule in the TCJA, to the extent that a positive Section 481(a) adjustment is required, the adjustment is spread over eight years.
Eversheds Sutherland Observation: The simplified procedures provided under the Revenue Procedure 2019-30 generally are favorable to taxpayers and for taxable years beginning after December 31, 2017, and ending on or before December 31, 2019, are the exclusive procedures for a taxpayer within the scope of the revenue procedure to obtain automatic consent to change a method of accounting covered by the revenue procedure.
The simplified procedures provided under Revenue Procedure 2019-30 apply to any property and casualty insurance company that changes its method of accounting for discounting unpaid losses, discounting salvage recoverable, or both to comply with amended Section 846, and to any life insurance company that changes its method of accounting for discounting unpaid losses to comply with amended Section 846, provided the taxpayer has a taxable year beginning after December 31, 2017, and ending before June 17, 2019, and meets one of two sets of conditions with respect to the discount factors used as set forth under the revenue procedure.
Generally, a taxpayer meets the conditions with respect to the discount factors used if the taxpayer either (i) uses the discount factors determined under amended Section 846 and the final regulations (Revised Discount Factors) as of the end of both its first taxable year beginning after December 31, 2017 (First TCJA Year) and the end of the preceding taxable year (Pre-TCJA Year) to determine its discounted unpaid losses and its estimated salvage recoverable, or (ii) uses the discount factors determined under amended Section 846 and the proposed regulations (Proposed Discount Factors) as of the end of both the First TCJA Year and the Pre-TCJA Year and uses the Revised Discount Factors as of the end of both the succeeding taxable year (Second TCJA Year) and the First TCJA Year to determine its discounted unpaid losses and its estimated salvage recoverable. This approach provides flexibility for taxpayers and takes into account the fact that some taxpayers filed their 2018 tax returns before the regulations under amended Section 846 were finalized. To satisfy either requirement, a taxpayer must take into account certain Section 481(a) adjustments provided under the revenue procedure.
Eversheds Sutherland Observation: Section 481(a) adjustments that must be made under this revenue procedure are relatively complex. Section 481(a) adjustments will vary if a taxpayer uses the Proposed Discount Factors in the First TCJA Year and the Revised Discount Factors in the Second TCJA Year instead of the Revised Discount Factors in both years. A taxpayer that uses the Proposed Discount Factors in the First TCJA Year and the Revised Discount Factors in the Second TCJA Year must take into account certain additional adjustments that generally account for differences between amounts computed using the Proposed Discount Factors and amounts computed using the Revised Discount Factors.
If a taxpayer satisfies all of the requirements set forth under Revenue Procedure 2019-30 and is within the scope of the revenue procedure, IRS consent is deemed granted with respect to the method change and the requirement to file IRS Form 3115 is waived. The simplified procedures provided under this revenue procedure are beneficial for taxpayers and should ease the burden of compliances for insurance companies that need to change their methods of accounting to comply with amended Section 846.