The mindset that captives are bad and need to prove their value, most often employed by the Internal Revenue Service (IRS), needs to change, according to Sheryl Flum, managing director at KPMG.
Speaking on a panel at the 2019 World Captive Forum in Miami, Flum, who spent more than 10 years at the IRS, predicted we may see a change in the way the IRS examines captives.
She said: “I believe that ultimately we’re going to see a more nuanced approach to the IRS’s examination of captives.”
“Right now they’re sending out information document requests, which are uniform, not specific to the facts of any individual captive.”
“They already have the assumption that a captive is bad and it needs to prove why it is good. It is that mindset within the IRS that needs to be changed.”
Another of the panelists, Charles Lavelle, senior partner at Bingham Greenebaum Doll, said he believed an equilibrium would be reached concerning micro captives in three to five years.
He added: “If the IRS wins all the cases it will be a worse scenario than now and if they lose some it may be better.”
Lavelle questioned the validity of the IRS’s current stance on the section 831(b) tax election.
He commented: “Through tax elections, Congress allows the taxpayer to choose how they want to be taxed.”
“The only rational basis they will make the decision between elections is because of which offers them a better tax result.”
“How can it be bad to choose the economically better option offered by Congress?”
