IRS Says Some Reserve Item Changes Equal Basis Changes, Require Amortization

The IRS Dec. 26 posted an Appeals settlement position on §807 basis adjustment, stating that any change in an insurance reserve item not caused by a correction of a nonrecurring mathematical or posting error is a change in basis that must be amortized over a 10-year period starting the subsequent taxable year.

The issue the paper addresses is whether such a change is subject to the 10-year spread or has to be treated as a correction of an error and taken fully into account in the year of change, IRS said. The Examination Division, with which Appeals agrees, made its decision “based on the plain language” of §807, which provides rules for certain reserves.

Some in the life insurance industry said the government's view of what constitutes an error in a reserve computation is too narrow, while its view of what equals a change in basis mandating a 10-year spread is too broad, according to the paper.

The settlement guidelines said an Appeals officer should carefully study any proposed adjustment under §807(f):

• to determine if the change in the reserve occurred because of a change in actuarial assumptions or correction of an error,
• to verify that the proposed adjustment is the difference between the ending reserves calculated under the new method and those calculated under the old method so the adjustment is attributable to contracts issued before the start of the taxable year, and
• to establish that the adjustment is proposed for the correct year.