60 days late is the smaller of the tax due
There are some instances when the
or credit on the return must be kept for 3
or $135. The penalty will not be imposed
corporation can obtain automatic consent
years from the date the return is due or
if the corporation can show that the failure
from the IRS to change to certain
filed, whichever is later. Keep records that
to file on time was due to reasonable
accounting methods. See Rev. Proc.
verify the corporation’s basis in property
cause. See Caution on page 3.
2011-14, 2011-4 I.R.B. 330, as modified,
for as long as they are needed to figure
or its successor. Also, see the
the basis of the original or replacement
Late payment of tax. A corporation that
Instructions for Form 3115.
property.
does not pay the tax when due generally
Safe harbor method of accounting for
may be penalized
/
of 1% of the unpaid
The corporation should keep copies of
1
2
premium acquisition expenses.
tax for each month or part of a month the
all filed returns. They help in preparing
Insurance companies subject to tax under
tax is not paid, up to a maximum of 25%
future and amended returns and in the
section 831 are provided with a safe
of the unpaid tax. See Caution on page 3.
calculation of earnings and profits.
harbor method of accounting for premium
Trust fund recovery penalty. This
Other Forms and
acquisition expenses. Form 3115 must be
penalty may apply if certain excise,
filed in order to change to the safe harbor
Statements That May Be
income, social security, and Medicare
method. For more information, see the
taxes that must be collected or withheld
Instructions for Form 3115 and item 67 in
Required
are not collected or withheld, or these
the List of Automatic Accounting Method
taxes are not paid. These taxes are
Changes.
Reportable transaction disclosure
generally reported on:
statement. Disclose information for each
Certain changes in method of
•
Form 720, Quarterly Federal Excise
reportable transaction in which the
accounting for organizations to which
Tax Return;
corporation participated. Form 8886,
section 833 applies. Blue Cross or
•
Form 941, Employer’s QUARTERLY
Reportable Transaction Disclosure
Blue Shield organizations under section
Federal Tax Return;
Statement, must be filed for each tax year
833(c)(2), or organizations described in
•
Form 944, Employer’s ANNUAL
that the federal income tax liability of the
section 833(c)(3), can obtain automatic
Federal Tax Return; or
corporation is affected by its participation
consent to change the method of
•
Form 945, Annual Return of Withheld
in the transaction. The following are
accounting for unearned premiums
Federal Income Tax.
reportable transactions.
resulting from either a failure to meet the
The trust fund recovery penalty may
MLR requirements of section 833(c)(5), or
1. Any listed transaction, which is a
be imposed on all persons who are
meeting the MLR requirements after
transaction that is the same as or
determined by the IRS to be responsible
failing to do so in a prior year.
substantially similar to one of the types of
for collecting, accounting for, and paying
transactions that the IRS has determined
See Rev. Proc. 2011-14, 2011-4 I.R.B.
over these taxes, and who acted willfully
to be a tax avoidance transaction and
330. Also, see section 3.08 of Notice
in not doing so. The penalty is equal to
identified by notice, regulation, or other
2010-79, 2010-49 I.R.B 809, Notice
the full amount of the unpaid trust fund
published guidance as a listed
2011-4, 2011-2 I.R.B. 282, and Notice
tax. See the Instructions for Form 720 or
transaction.
2011-51, 2011-27 I.R.B. 36.
Pub. 15 (Circular E), Employer’s Tax
2. Any transaction offered under
Guide, for details, including the definition
conditions of confidentiality for which the
Accounting Period
of responsible persons.
corporation (or a related party) paid an
An insurance company must figure its
advisor a fee of at least $250,000.
Other penalties. Other penalties can be
taxable income on the basis of a tax year.
3. Certain transactions for which the
imposed for negligence, substantial
A tax year is the annual accounting period
corporation (or a related party) has
understatement of tax, reportable
an insurance company uses to keep its
contractual protection against
transaction understatements, and fraud.
records and report its income and
disallowance of the tax benefits.
See sections 6662, 6662A, and 6663.
expenses.
4. Certain transactions resulting in a
loss of at least $10 million in any single
Accounting Methods
As a general rule under section 843,
year or $20 million in any combination of
the tax year for every insurance company
Figure taxable income using the method
years.
is the calendar year. However, if an
of accounting regularly used in keeping
5. Any transaction identified by the
insurance company joins in the filing of a
the corporation’s books and records. In all
IRS by notice, regulation or other
consolidated return, it may adopt the tax
cases, the method used must clearly
published guidance as a “transaction of
year of the common parent corporation
show taxable income. Permissible
interest.”
even if that year is not a calendar year.
methods include cash, accrual, or any
other method authorized by the Internal
Rounding Off to Whole
For more information, see Regulations
Revenue Code.
section 1.6011-4. Also see the
Dollars
Instructions for Form 8886.
The gross amounts of underwriting
The corporation can round off cents to
and investment income should be
Penalties. The corporation may have
whole dollars on its return and schedules.
computed on the basis of the Statement
to pay a penalty if it is required to disclose
If the corporation does round to whole
of Income of the NAIC annual statement
a reportable transaction under section
dollars, it must round all amounts. To
to the extent not inconsistent with the
6011 and fails to properly complete and
round, drop amounts under 50 cents and
Internal Revenue Code and its
file Form 8886. Penalties may also apply
increase amounts from 50 to 99 cents to
Regulations. In all cases, the method
under section 6707A if the corporation
the next dollar. For example, $1.39
used must clearly show taxable income.
fails to file Form 8886 with its corporate
becomes $1 and $2.50 becomes $3.
return, fails to provide a copy of Form
Change in accounting method.
8886 to the Office of Tax Shelter Analysis
If two or more amounts must be added
Generally, the corporation must get IRS
(OTSA), or files a form that fails to include
to figure the amount to enter on a line,
consent to change the method of
all the information required (or includes
include cents when adding the amounts
accounting used to report taxable income
incorrect information). Other penalties,
and round off only the total.
(for income as a whole or for the
such as an accuracy-related penalty
treatment of any material item). To do so,
Recordkeeping
under section 6662A, may also apply. For
the corporation generally must file Form
details on these and other penalties, see
3115, Application for Change in
Keep the corporation’s records for as long
the Instructions for Form 8886.
Accounting Method. For more
as they may be needed for the
information, see the Instructions for Form
administration of any provision of the
Reportable transactions by material
3115, and Pub. 538, Accounting Periods
Internal Revenue Code. Usually, records
advisors. Material advisors to any
and Methods.
that support an item of income, deduction,
reportable transaction must disclose
-4-
Instructions for Form 1120-PC (2011)