WASHINGTON -- Regulators and the Internal Revenue Service, bowing to pressure from bankers, have agreed to return to an earlier system for verifying loan that have been charged off.
The IRS will again rely on regulators to certify that each bad loan has been charged off properly. For the last two years, the regulators and IRS had been arguing over a proposal that regulators certify only a bank's methods for classifying loans.
"We like it," Henry C. Ruempler, the American Bankers Association's top tax expert, said Monday of the reversal. "The old system was working fine."
IRS Asks Assurances
Because banks deduct bad loan from income - $32.8 billion in 1991 - the IRS wants bank regulators to provide assurances that the loans were properly written off. The agencies and the IRS have been wrangling since June 1990 over the best way to confirm that a bad loan has been charged off.
Historically, bank examiners verified the validity of a charge-off with a letter to the bank.
But the Comptroller of the Currency stopped sending these letters a few years ago, Mr. Reumpler said, and the IRS started challenging bank deductions for bad debts.
Problem with System
Bankers complained so the IRS in May 1991 proposed a new method that would have required regulators simply to certify that they approved of a bank's general procedures for classifying troubled loans.
That system, which focused on a bank's operations rather than individual loans, was adopted by the IRS on Feb. 24.
But then the Federal Deposit Insurance Corp. objected, saying the plan could backfire on regulators of banks with approved procedures later ran into problems.