IRS offers settlement for micro-captive insurance schemes

September 17, 2019

Background: The tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Under §831(b) certain small insurance companies can choose to pay tax only on their investment income. In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance.

IRS Focus on Abusive Micro-captives: Micro-captive insurance arrangements have been an area of IRS concern for a number of years. They have been on the list of the IRS’s “Dirty Dozen” top tax scams since 2014. They are also listed as a “transaction of interest” by the IRS in Notice 2016-66 for purposes of “reportable transactions” under Section 6111 and filing of Form 8886. There have also been a number of recent Tax Court cases involving captive insurance companies with the IRS prevailing.  
As a result of these cases, the IRS is now issuing letters to impacted taxpayers under audit for this issue of a settlement arrangement with specified terms. The full settlement terms have not been released for impacted taxpayers. There will also be a time limit for impacted taxpayers to accept the settlement. Apparently there are many taxpayers that have been audited on this issue and have cases ready to go to court, and the IRS is trying to resolve these cases and reduce the backlog. 

Taxpayers involved with micro-captives who do not receive such a letter, however, are not eligible for this resolution. They will continue to be challenged/targeted by the IRS. Find details here.

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