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In the complex world of Disability claim adjudication, few documents offer as much insight into an insured’s work profile as their tax returns. Although medical evidence remains one of the cornerstones of any claim determination, financial documentation – especially annual tax returns – both individual and corporate, complete with all schedules and attachments, provides a factual lens into the insured’s actual occupation, work patterns, other earned income, and income consistency.
Below are a few reasons why the practice of obtaining annual tax records is essential.
A precise understanding of the insured’s “occupation” is fundamental to claim adjudication and policy application. Although not all policyholders have an employer relationship where job descriptions or paystubs are available to provide you with material and substantial duties of the role, pay structure, and hours worked vs. benefit hours (sick, vacation, paid time off, etc.), tax returns offer more insight into the passive and nonpassive income received by the insured. Tax return forms – particularly Schedules C and K‑1 or business filings – may reveal the depth and breadth of an insured’s occupational duties, business ownership, professional engagement, and expenses.
For self-employed individuals, returns often offer the scope of services provided, the presence of employees, and the diversity of income streams – all valuable indicators of occupational complexity and physical or cognitive demands. For salaried employees, comparing paystubs at the onset of disability with their year-end W2 form may assist in validating the claim’s date of disability.
In addition, tax records provide information for all reported income sources. In an economy where the gig workforce is increasing,1 and income may be earned outside of the traditional cubicle walls, tax documentation can assist with the identification of the insured’s occupation according to the policy language and aid in the determination whether the reported occupation aligns with the claim narrative.
When combined with other occupational support (e.g., employment contracts, formal job descriptions and pre-disability financial statements such as paystubs and profit and loss statements), tax returns provide a reliable anchor to help define what the insured actually did when the disability commenced, ensuring their “occupation” is characterized accurately under the policy terms.
Disability policies are often built around pre-disability earnings and the assumption of full-time work. However, many insureds – particularly those who are self-employed, seasonal, or transitioning to reduced capacity – may not have been working at full-time levels when disability began.
Tax returns offer a measure to assess work activity and engagement trends, helping to establish whether the insured maintained a consistent full-time schedule leading up to the date of disability. For wage earners, comparing their W‑2 tax form income across multiple years provides a clear trajectory of earnings patterns. For business owners or contractors, Schedule C (form 1040) and partnership returns illuminate fluctuations in gross receipts, expenses, and net profit that may reflect reduced working hours, seasonality of a business, modified duties, or extenuating circumstances prior to the claimed disability onset.
Although tax returns are not the only resource to determine a claimant’s pre-disability employment status, they are a comprehensive tool to help navigate the claim’s complexity. For example, this context is essential to determine whether eligibility, benefit calculations, elimination period applicability, and residual definitions are being applied correctly.
In addition, if an insured engages in other occupation work, tax returns – both individual and corporate – may also provide insight into similarities to the insured’s pre-disability occupational duties and, therefore, provide an opportunity to proactively engage in return-to-work planning discussions with the insured.
One of the most important yet overlooked uses of tax returns in ongoing claims management is the validation of income consistency with reported impairment level.
Annual returns can reveal whether the insured continues to earn, or demonstrates the capacity to earn, at pre-disability levels and therefore consistent with total or partial disability definitions. As mentioned above, they may help identify unreported employment, receipt of unemployment benefits (which requires attestation to being ready and willing to work if work were to become available), business activity, or deferred income streams that may not appear on monthly earnings statements. Additionally, trends in business income, expenses, or 1099 forms can indicate ongoing activity inconsistent with the claimed degree of impairment or preclude the insured from benefit eligibility.
Tax return schedules and forms may also indicate other employment similarities to pre-disability occupation duties, and aid in building return-to-work strategies.
For example: If an insured receives a substantial annual bonus, it may impact their eligibility for initial or ongoing disability benefits depending on the policy’s Total Disability or Residual Disability provision requirements.
To ensure accurate identification of annual income, at claim onset and ongoing, you may consider a qualified financial resource review. Financial transparency helps ensure benefit payments remain aligned with policy intent.
Encouraging insureds to submit financial proof of loss, to include documentation of their annual tax return filed with the Internal Revenue Service, fosters a culture of transparency and mutual accountability. Obtaining annual tax returns reduces investigative uncertainty, thus expediting decision-making and equipping the claims professional with the opportunity to support one’s return-to-work efforts.
As the industry continues to leverage technology to streamline claim workflows, keeping the financial documentation review process within the workflow, both in the early stages of adjudication and throughout the life of the claim, remains a best practice for both risk management and operational excellence.
Tax returns are more than just financial documents – they are key indicators of potential increased levels of function that assist claims professionals when lending support for an insured’s return-to-work planning efforts.
The Gen Re Financial Guide, offered only to our clients, provides samples of U.S. and Puerto Rico tax forms, schedules, and attachments, to assist claims and underwriting professionals in understanding financial components in claims adjudication. For additional information, please do reach out to me or your Gen Re claims specialist.
Watch for my next article that will offer insights on utilizing tax returns to assist in the ongoing Disability Income eligibility for the self‑employed.
With contribution from Connie M. Cardamone, President, CPA Risk Services, Inc.
