The Internal Revenue Service (IRS) has scope to improve its reviews of offshore insurance audits and investigations, as well as how it records and analyses the quality reviews of such investigations, according to a study by the U.S. Government Accountability Office (GAO).
Explaining the reason for the review, GAO says that since tax evasion schemes involving offshore insurance are complex and resource-intensive for the IRS to pursue, it is important for the agency to conduct compliance programmes effectively.
GAO reviewed how the IRS conducts enforcement on offshore insurance compliance issues, and evaluated the extent to which the IRS reviews its guidance on offshore insurance to ensure the guidance has the intended effect.
The study also examined the extent to which the IRS aligns oversight of its audit activities on taxpayers who may be abusing micro captive insurance tax shelters with IRS audit policies and guidance, and reviewed the IRS’ investigation activities on the promoters of abusive offshore insurance tax shelters.
It is no secret that the IRS has prioritised with enforcement the investigation of micro captive insurance arrangements. The agency generally uses two approaches. One is managerial reviews, consisting of various types of written reviews, including in-process case reviews and workload reviews. The second is quality reviews, conducted by independent reviewers outside of the audit workstream.
Following its study, GAO made several recommendations relating to how the IRS oversees its taxpayer audits and promoter investigations involving micro captive insurance arrangements.
Firstly, GAO recommends that the Commissioner of Internal Revenue ensures that the small business and self-employed division (SB/SE) provides more specific guidance on when SB/SEs should use various managerial review tools, and the frequency with which such reviews should be conducted on high-priority matters (in this case, micro captive arrangements).
Similarly, GAO recommends that the large business and international division (LB&I) of the IRS adopts formal managerial reviews of its audits, and establishes methods and procedures for recording and analysing managerial review data to isolate high-priority micro captive cases.
It is recommended that both SB/SE and LB&I subject a sample of their micro captive insurance audits to a formal quality review process.
Regarding the IRS’ review of micro captive promoter investigations, GAO recommends that SB/SE design and implement an identification and tracking method in its embedded quality review system to allow agency officials to easily identify and compare micro captive promoter investigations.
GAO also recommends LB&I establish and implement metrics on promoter investigation quality, including subjecting a set of micro captive promoter penalty investigations to formal quality review procedures to establish a baseline measure of micro captive promoter investigation quality.
The IRS disagreed with the recommendations, stating its current oversight practices are sufficient to ensure micro captive audits are conducted accurately.
