SOURCE: Foreign Insurance Excise Tax - Audit Technique Guide, April 2008, as found at http://www.irs.gov/businesses/small/art ... 63,00.html NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Chapter 8 - Consolidated Returns
While technically not correct, it is not uncommon to see a consolidated Form 720 return filed by a domestic parent corporation which may or may not be in the insurance industry. The parent company will consolidate the filing requirements of itself and its insurance subsidiaries in order to minimize the number of returns filed. Consolidated returns pose a number of problems. First, it is difficult to identify the correct taxpayer unless detailed records are maintained. Second, it will appear that the insurance company subsidiaries are not filing returns or remitting the tax due on foreign insurance premiums ceded.
Who is the Taxpayer?
Many times an insurance policy is written for the use and benefit of a number of entities as insureds/policyholders. The parent company makes one lump premium payment to the foreign insurer. The parent company files a consolidated Form 720 reporting the tax on the foreign insurance premiums paid by or on behalf of all of the entities in the affiliated group.
The parent company then uses inter-company accounts to charge each of the subsidiaries their portion of the insurance premiums and related tax. Each of the entities is the taxpayer and is liable for the excise tax. This is due to the fact that each entity is the insured/policyholder. It is important to remember that the taxpayer need not be the party that makes the actual payment to the foreign reinsurer.
Accordingly, a separate Form 720 for the tax should be filed by each of the respective entities. Each of the Forms 720 should reflect the tax applicable to the portion of the total premium paid or allocated to each entity and should be filed under their own EIN.
It is important to remember that although the Service collected the tax, the tax was reported in part by an incorrect entity. This results in the subsidiaries, who did not file returns, to have an open statute. Also, the subsidiaries who have not filed a return reflecting tax paid would not be allowed to claim a refund should a refund situation arise.
Identification of Consolidated Excise Returns
The existence of a consolidated Form 720 can be determined in a number of ways. As part of the preaudit review of a large affiliated group, the Form 851, Affiliations Schedule, is a good resource to determine whether the taxpayer has one or more insurance companies included in its affiliated group. An in-depth interview of the taxpayer concerning any insurance company affiliations as well as a review of the workpapers used to prepare the Form 720 are also excellent ways to determine if a consolidated return has been filed.
Examination of Consolidated Excise Returns
When confronted with the examination of a return which turns out to be a consolidated return, the examiner will need to verify that all the ceded foreign insurance premiums have been reported. The examiner will also need to determine the proper allocation of tax due to all affected entities. In the case of a return filed by a parent insurance company, this may be accomplished by reconciling the foreign premiums ceded per the NAIC Annual Statement to the ceded reinsurance premiums declared on the Form 720.
The NAIC Annual Statement is prepared by the parent insurance company and all the insurance subsidiaries. Foreign reinsurers are listed in Schedule F, Part 3 for property and casualty insurance. Life insurance is reported on Schedule S. In addition, a Form 5471 or 5472 may be attached to the income tax return of an insurance or non-insurance corporation. These two forms may also provide information concerning foreign insurance premium payments and affiliations.