Revenue Procedure 2019-10: Automatic method change procedures for insurance company reserves

Authored by Matthew Harvey

On Dec. 13, 2018, the Internal Revenue Service (IRS) released Revenue Procedure 2019-10, which modifies Revenue Procedure 2018-31 and contains guidance for an insurance company changing its basis of computing reserves under Internal Revenue Code (IRC) section 807(f).

Prior to the Tax Cuts and Jobs Act (TCJA), section 807(f) provided that if an insurance company changed its basis of computing reserves they did so by spreading the difference evenly over a 10-year period, beginning in the year the change was made. For tax years beginning after Dec. 31, 2017, and as modified by the TCJA, section 807(f) now requires an insurance company to treat any changes in computing its reserves as a change in method of accounting under section 446.

Revenue Procedure 2019-10 modifies Revenue Procedure 2018-31 to address the changes the TCJA made to section 807(f) and adds a new automatic method change under section 26.04. Under this new procedure, an insurance company seeking to make a change in the basis of computing reserves must now file Form 3115, Application for Change in Accounting Method. When an insurance company increases the basis in reserves, resulting in a favorable adjustment to taxable income, it will recognize this adjustment in the year of change as provided by section 481(a). Conversely, when an insurance company decreases its basis in reserves, resulting in an unfavorable adjustment to taxable income, it will recognize this adjustment equally over a four-year period, beginning in the year of change.

Changes to the basis in reserves in a year beginning prior to Jan. 1, 2018, will continue to be recognized equally over the 10-year period. Any changes to reserves due to the transitional adjustment rule under Section 13517(c)(3) of the TCJA, will continue to be recognized equally over the eight-year period.

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