The Internal Revenue Service (IRS) has continued to scrunitise captive insurance with micro captives featuring on the ‘Dirty Dozen’ tax scams list for the second year running.
The ‘Dirty Dozen’ list calls out tax scams that the IRS will be targeting in the coming year, and micro captives using the 831(b) election, whose premiums equal less than $1.2 million per year, remain within its sights.
Captive insurance policies may attempt to cover the same risks as are covered by the entities’ existing commercial coverage, but the captive policies’ ‘premiums’ may in fact be double or triple the premiums of the policy owners’ commercial policies, noted the IRS.
Annual premium amounts are frequently targeted to the amounts of deductions business entities seek in order to reduce their taxable income.
According to the IRS, in these abusive schemes, total premiums can equal up to $1.2 million annually to take full advantage of the 831(b) premium income exclusion provision. Underwriting and actuarial substantiation for the insurance premiums paid are either absent or illusory.
The promoters manage the captive insurance companies for substantial fees, assisting taxpayers unsophisticated in insurance, to continue the charade from year to year.
The Protecting Americans from Tax Hikes Act of 2015 reins in certain of the micro captive abuses that the IRS is currently combatting. Those provisions are effective for small insurance companies’ taxable years beginning after 31 December 2016.
IRS commissioner John Koskinen, commented: "Taxpayers should steer clear of unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed. These schemes can end up costing taxpayers more in back taxes, penalties and interest than they saved in the first place.”
In addition, misuse of trusts, inflated refund claims, return preparer fraud, fake charities, excessive claims for business credits and frivolous tax arguments were all included on the ‘Dirty Dozen’ list.
