Captive insurance has been included in the Internal Revenue Service’s (IRS) ‘Dirty Dozen’ list of tax scams.
The Dirty Dozen list, which is compiled every year to warn US taxpayers about scams that the agency is planning to crack down on, included captive insurance under abusive tax shelters, the ninth “illegal scam” on the list.
The IRS said that legitimate 831(b) election structures, or “small or micro” captives, are used by “unscrupulous promoters”, who help with drafting organisational documents and preparing initial filings to state insurance authorities.
“The promoters assist with creating and ‘selling’ to the entities often times poorly drafted ‘insurance’ binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant ‘premiums’, while maintaining their economical commercial coverage with traditional insurers,” explained the IRS.
“Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the code provision.”
Underwriting and actuarial substantiation for the insurance premiums paid “are either missing or insufficient”, said the IRS. “The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.”
Commenting on the inclusion of abusive tax shelters in the 2015 Dirty Dozen list, IRS commissioner John Koskinen said: “The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”
