Although the removal of mirco captives from the Internal Revenue Service’s 2020 ‘Dirty Dozen’ list was a positive step forward, Ryan Work, vice president of Self-Insurance Institute of America (SIIA), highlighted “it by no means signals a weakening or slow down in IRS activities aimed at 831(b) transactions, exams and audits”.
For the last five years, the IRS has referred to micro captives as an “abusive tax shelter” and suggested that certain 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 insurance”.
Work said the IRS’ use of descriptive terms in its past ‘Dirty Dozen’ listings of captives, phrases such as ‘tax scams’ and ‘esoteric, implausible risks,’ were thrown around like they were the rule in the industry, rather than the exception.
He explained: “That has simply not been the case. The fact remains that, considering the other priorities and the limited resources the IRS has, 831(b) captives should have been removed from the list years ago. This industry is not what it was 10 years ago, where the service seems to be stuck at. To the contrary, it has evolved and advanced during the time through improved practices, management and procedures.”
“While the IRS will continue its oversight and focus on micro captives, and delisting will certainly help with perception, the industry should continue to do what it does best - growing and developing captive insurance structures that mitigate against real evolving risks,” he added.
Also commenting on the removal of mirco captives was Peter Kranz, executive managing director and captive practice leader at Beecher Carlson, who noted that it is “encouraging” to see the IRS’ 2020 ‘Dirty Dozen’ list did not include ‘abusive micro captives’ this year.
However, Kranz said: “This is still part of the industry which needs to be cleaned up. It’s encouraging because the vast majority of all captives have been established the right way and for the right reasons – sound risk management and financing purposes.”
Although micro captives were removed from the official listing, in the same announcement the IRS stated that an upcoming series of releases will be published on topics such as “abusive micro captives and fraudulent conservation easements”.
Kranz noted that those players who continue to promote the abusive structures shouldn’t feel too much relief due to the upcoming series of releases by the IRS. He stated: “They will emphasise the illegal schemes and techniques businesses and individuals use to avoid paying their lawful tax liability.”
Reflecting on upcoming releases that will focus on ‘abusive micro captives’ he emphasised that the IRS is going to continue to pursue the bad actors.
Kranz suggested that this year’s ‘Dirty Dozen’ list focuses on scams that target taxpayers’, and noted that the ‘abusive micro captives’ don’t fall into that category.
He added: “So it’s not so much their being dropped from the list as it is the list’s focus being changed.”
“Ultimately, if you set your captive up for the right reasons and in the right way, have your transactions reviewed by competent tax professionals to provide guidance on how they should be treated, you should have a level of comfort. It never means the IRS won’t challenge a position, but the IRS can challenge a position on any topic – that possibility has always existed. You just need to do things right.”
Alan Fine, tax partner and captive insurance industry group leader at Brown Smith Wallace, also weighed in: “While the fact that the IRS left micro captives off the ‘Dirty Dozen’ may be perceived as positive news, it should not be interpreted as indicating they are giving up their fight or changing their position.”
Commenting on the upcoming releases from the IRS, Fine added: “This language, in concert with the January 2020 release announcing the creation of 12 new teams formed to audit micro captives, makes it clear that the IRS intends to continue its dogmatic pursuit of this segment of our industry.”
