The Internal Revenue Service (IRS) has maintained micro-captives on its annual ‘Dirty Dozen’ list of potentially abusive tax arrangements.
This proposal follows the mention of micro-captives on its 2023 list.
Tax law generally allows businesses to create captive insurance companies to protect against insurance risks.
It also provides that some small non-life insurance companies can choose to pay tax solely on their investment income under Internal Revenue Code section 831(b). These are known as micro-captives.
According to the IRS, abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance.
The institution states: “These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages.
“In addition, the premiums paid under these arrangements are often excessive, reflecting non-arm’s length pricing.”
The IRS emphasises that combating abusive micro-captive transactions remains a high-priority enforcement area.
The agency has prevailed in most of the micro-captive tax and appellate court cases since 2017.
Recently, RMC Group became the first captive manager to succeed in court against the IRS on this issue, marking a significant step in the ongoing dialogue surrounding compliance in captive insurance company management.
