Tax reform’s impact on life insurance reporting

Authored by Carrie Small and Mike Gehr

Reporting requirements for certain life insurance contract transactions require significant changes as a result of the Tax Cuts and Jobs Act (TCJA). While the law simplifies some cost basis reporting provisions by reversing the Internal Revenue Service’s (IRS) previous position under Revenue Ruling 2009-13, the TCJA adds to the insurer’s reporting responsibilities by requiring identification and reporting of specific information to the IRS in a reportable policy sale.

Under the TCJA the required information reported by the buyer to the IRS regarding a purchase is (1) the buyer’s name, address, and taxpayer identification number (TIN), (2) the name, address, and TIN of each recipient of payment in the reportable policy sale, (3) the date of the sale, and (4) the amount of each payment. The issuer is required to report to the IRS and to the seller (1) the basis of the contract, (2) the name, address and TIN of the seller or the transferor to a foreign person, and (3) the policy number of the contract. Lastly, when a reportable death benefit is paid under certain life insurance contracts, the payor insurance company is required to report information about the payment to the IRS and to the payee. This reporting requirement requires the payor to report (1) the gross amount of the payment; (2) the taxpayer identification number of the payee; and (3) the payor’s estimate of the buyer’s basis in the contract.

The U.S. Department of the Treasury (U.S. Treasury) and the IRS issued Notice 2018-41 on April 26, 2018. This notice states that the U.S. Treasury and the IRS intend to issue proposed regulations that will assist the taxpayers in complying with the new reporting requirements by defining terms and providing clarification about which taxpayers are subject to the new reporting requirements. The notice also provided transitional guidance stating that the new reporting rules will not be required until the regulations have been issued and asked for public comments to be submitted by June 13, 2018.

The IRS also noted that there is significant effort directed at drafting these guidelines. A large team, including IRS staff from other divisions outside of the Financial Institution and Products division, has been working towards implementing these complex insurance reporting requirements. While the IRS understands that taxpayers are anxiously awaiting guidance, it was reiterated that reporting relief is provided for transactions taking place beginning on or after January 1, 2018 and prior to the issuance of these regulations.

For more information on the implications of tax reform, or to learn how Baker Tilly professionals can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.