Question

Property/casualty insurance companies have been criticized because they reserve for the total loss as much as 5 years before it may happen. The IRS has joined the debate because it says the full reserve is unfair from a taxation viewpoint. What do you believe is the IRS position?

Short answer

The IRS believes that reserves should be discounted on present value, which will lead to an increase in income and, therefore, in income taxes.

Step-by-step solution

Definition of IRS

The IRS stands for Internal Revenue Service, a federal agency of the US government responsible for collecting the taxes and enforcing tax laws.

Position of IRS

The IRS argues that the future reserves must be discounted to the present value. This will lead to smaller reserves, so they charge less of income. This will result in higher income and higher income taxes as well.