This chapter is an overview of the Insurance Industry Handbook.

This handbook has been prepared to assist field agents in the examination of insurance company income tax returns.

The examination of insurance company returns requires special auditing skill. This handbook has been prepared to assist you in developing this skill so you may completely and confidently examine the most difficult and complex insurance company returns.

Through diligent use of this handbook you will shorten the time needed to acquire the auditing skills essential to this specialty. Of course, nothing contained herein should discourage you from improving upon these techniques or from exercising your own initiative and ingenuity.

This handbook is a compilation of the auditing techniques used by some of our most experienced revenue agents. They are presented in a manner intended to illustrate the unusual problems encountered in examining Federal income tax returns involving insurance company transactions.

This industry is subject to a large number of substantive tax provisions. However, our references to the tax law will be general and brief in nature and should not be relied upon for an understanding of the law. Rather, you should augment this handbook by researching a particular tax issue.

Many audit features are common to both commercial enterprises and insurance industry. In these instances, similar audit techniques may be applied. This handbook will stress areas peculiar to insurance companies.

We would like to emphasize that the auditing methods and techniques in this issuance are permissive and are not intended to be mandatory procedures and instructions for field personnel.

This handbook does not alter existing technical or procedural instructions contained in the Internal Revenue Manual (IRM). In the event of any inconsistencies between this handbook and the basic text of the IRM, the IRM will prevail. Procedural statements in this issuance are for emphasis and clarity and are not to be taken as authority for administrative action.

A glossary has been included to help you understand the various terms used in this industry. It is not all-inclusive, but can be a starting point in developing knowledge of the industry.

As previously stated, many of the basic auditing techniques used in examining insurance company returns do not differ from those used in examining other returns. Receipts and expenditures should be verified to the extent necessary from basic documents, such as invoices, statements of creditors, and canceled checks.

From this point, the examination of an insurance company differs from other types of taxpayers. Taxable income is not controlled entirely by gross receipts and expenditures. Specifically, the taxable income of an insurance company depends upon the total of investment income and underwriting income. Life insurance company taxable income may also include distribution from the policyholders surplus account. The computation of these amounts may be somewhat complex.

These guidelines contain suggested step-by-step techniques to follow in determining correct taxable income and income tax liability of the two main types of insurance companies in the United States. The two types are:

The guidelines consider these two types separately. When you are assigned an insurance company return for examination, you may refresh your memory by turning to the section which discusses the special techniques applicable to the particular type of insurance company.

Since certain terms used herein may be new to you, a glossary of terms is provided in Chapter 3 of this handbook. This glossary will also assist you to "learn the language" of the insurance business, a necessary skill.

These audit technique guidelines are based on the post 1983 tax returns of life insurance companies.

The line of demarcation between a case which can be processed completely by the agent and a case requiring the assistance of specialist revenue agents cannot be clearly drawn. Where the insurance company qualifies as a "large case" the Coordinated Examination Program (CEP) requirements and recommendations should be followed. In other type cases, should an engineer or other specialist be considered helpful in the conduct of the audit, the agent with the concurrence of his supervisor should take the initiative in requesting such assistance. A Computer Audit Specialist (CAS) should be requested in all cases where the accounting records are computerized.

Technical advice should be secured from the National Office as soon as such procedure is indicated.

The following partial list of authoritative references is submitted to assist in researching and gaining background knowledge of the insurance industry:

See Revenue Rulings applicable to insurance companies for further information.