The Internal Revenue Service (IRS) will be mailing a time-limited settlement offer for certain taxpayers under audit who participated in ‘abusive’ micro captive insurance transactions.
Under section 831(b) of the Internal Revenue Code, certain small insurance companies can choose to pay tax only on their investment income. Taxpayers eligible for this offer will be notified by letter with the applicable terms. Taxpayers who do not receive such a letter are not eligible for this resolution.
The settlement requires substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties—unless the taxpayer can demonstrate good faith, reasonable reliance.
The initiative is currently limited to taxpayers with at least one open year under exam.
Taxpayers who also have unresolved years under the jurisdiction of the IRS Appeals may also be eligible, but those with pending docketed years under counsel’s jurisdiction are not eligible.
In addition, taxpayers who receive letters under this settlement offer, but who opt not to participate, will continue to be audited by the IRS under its normal procedures.
Potential outcomes may include full disallowance of captive insurance deductions, the inclusion of income by the captive, and imposition of all applicable penalties.
Taxpayers who are offered this private resolution and decline to participate will not be eligible for any potential future settlement initiatives.
The IRS said it will continue to assess whether the settlement offer should be expanded to others.
The IRS has revealed it also plans to continue to open additional exams in this area as part of ongoing work to combat these abusive transactions.
IRS commissioner Chuck Rettig commented: “The IRS is taking this step in the interests of sound tax administration. We encourage taxpayers under exam and their advisors to take a realistic look at their matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases. We will continue to vigorously pursue these and other similar abusive transactions going forward.”
Micro captives have come under scrutiny by the IRS for several years, appearing on the IRS’ ‘Dirty Dozen’ list of tax scams since 2014.
In 2016, the Department of Treasury and IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.
The IRS has recently won three court cases against captive companies regarding tax. Following these cases, the IRS has decided to offer settlements to taxpayers currently under exam.
Tax law allows businesses to create captive insurance companies to protect against certain risks.
Under section 831(b) of the Internal Revenue Code, 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.
