Most insurance companies may have experienced the occasional federal excise tax examination, but all has been quiet in recent history regarding income tax examinations. This likely has to do with some significant challenges the IRS has been facing.
Anyone waiting on the IRS can attest to the gradual slowing of the IRS’ ability to process correspondences and returns to the point where the best characterization is now “extremely slow.” The IRS reports service delays in live phone support, processing paper-filed returns, answering mail from taxpayers, and reviewing tax returns, even for returns filed electronically, due to COVID-19 related delays. As a result, the IRS announced it was delaying the start of the 2021 tax season to prevent further backlogs.
Tax professionals will note, however, the IRS was facing challenges even before the COVID-19 pandemic. The IRS’s Data Book for the fiscal year 2019 reported that in the fiscal year 2010, the IRS received around 230 million returns and employed 13,879 revenue agents. By the fiscal year 2019, the number of revenue agents decreased to 8,526 even though the number of returns had increased by nearly 10 percent. Many saw a direct correlation between this trend and the IRS’s decreased budget for the same 10-year period. With the decrease in revenue agents, the decrease in IRS exams naturally followed.
For insurance companies, the reason for a decrease in IRS examinations may also be two-fold. An insurance company comes with an entirely separate set of rules from state regulations to special tax code sections. Insurance accounting and taxation is certainly a specialized knowledge set. While there may have been IRS agents with that knowledge set, many of them have likely retired without replacements. Due to the above-referenced budget cuts, the training required to develop this knowledge set waned – and so did the insurance company IRS exam.
While the IRS has put many new examinations and collection enforcement activities on hold under the People First Initiative (as announced in IR-2020-59), we may see an increase in IRS exams as the country (hopefully) lifts itself out of the economic setbacks caused by COVID-19. With all this said, we must also always remember that just as no one is 100% immune from this virus, no taxpayer is 100% immune from a tax examination – including your insurance company. Regardless of the chances of being selected for an examination, it is imperative that we understand our areas of exposure in a forward-thinking manner. Doing so will ensure you are prepared to address any difficult questions that may arise when the examiners arrive. For more information, contact your local CRI advisor.