PRA Group Announces Settlement with IRS

Yesterday, PRA Group, Inc, (Nasdaq:PRAA) issued a press release announcing they had reached a settlement with the Internal Revenue Service (IRS) in regards to Notices of Deficiency for tax years 2005 to 2012. The matter had been scheduled for trial this month. A copy of the press release can be found here.

Under the agreement, which remains subject to court approval, PRA Group will utilize a new tax methodology to recognize net finance receivable (NFR) revenue effective tax year 2017. The Company will not be required to pay any interest or penalties related to the prior periods. 

Per the press release: 

"This settlement ends a long outstanding tax controversy and puts this matter behind us. Additionally, the new methodology is consistent with an approach we have been supportive of for years," said Kevin Stevenson, President and Chief Administrative Officer for PRA Group. "This settlement should have no direct impact on reported earnings since we are not required to pay interest or penalties related to prior periods. This controversy has always been simply a matter of tax payment timing, not of ultimate tax payment or tax accrual for financial statement purposes. Additionally, we do not expect this to have any material impact on our ability to purchase nonperforming loans." 

The dispute with the IRS was detailed in a LexisNexis Law360 article on October 30, 2014 by Erica Teichert (subscription required). In that article Ms. Teichert wrote: 

“Consumer debt collector Portfolio Recovery Associates Inc. has asked the U.S. Tax Court to reverse an Internal Revenue Service finding that it owes $192.6 million in back taxes stemming from the defaulted consumer debt accounts it purchases, saying that the agency inappropriately recalculated its taxable income using different accounting methods.

Although PRA calculated its taxable income for tax years 2008 through 2012 using a cost recovery accounting method, the IRS told the company in a deficiency notice that it wasn't entitled to use that calculation, according to a petition filed on Oct. 8."

Per the article, PRA maintained that its accounting methods were appropriate because it is in the business of buying extremely risky assets without any guarantee of recovering its investments or making a profit. As a result, the company says it uses the the cost recovery accounting method so it can "recover all the costs for each consumer debt account deal it makes before reporting its taxable income from collection on the accounts."

In an article by Bryan Koenig published yesterday afternoon in LexisNexis Law360 (subscription required) Koenig wrote: 

“Details of the deal were sparse, including in Tax Court Judge Cary Douglas Pugh’s order on Monday — the same day trial had been set to begin — striking the case from the record and giving the parties until June 14 to file an update or submit their proposed settlement documents. 

Exactly how much money was at issue had also been in dispute, with PRA’s mid-April pretrial filing showing that the company thought the bill totaled more than $170 million although it said that the IRS’ math pegged it as in excess of $250 million. The parties appear to have resolved the math difference in protected filings afterward.”

insideARM Perspective 

From the little information provided in the press release to the limited information insideARM was able to find from other public sources, the settlement appears to be positive for PRAA. The key takeaways are that the company is not required to pay any interest or penalties and the settlement will have no impact on reported earnings.