The Internal Revenue Service’s (IRS) controversial Notice 2016-66 is an “attempt to poison the carrot” of Section 831(b), according to Sean King, principal of CIC Services.
King submitted comments to the IRS in response to Notice 2016-66, which last year listed micro captives as ‘transactions of interest’ to the US tax collection agency.
Transactions of interest are a type of reportable transaction first established by the IRS in 2006 and since then, only six transactions have been labelled as such, including micro captive transactions.
According to King, Notice 2016-66 “undermines important public policies as codified by Congress, unfairly targets small businesses, attempts to administratively repeal Internal Revenue Code Section 831(b), impinges upon the exclusive authority of the states to regulate and define insurance, runs in contravention to court precedent, has many unintended but devastating consequences, and subverts the rule of law”.
Notice 2016-66 requires reporting by any taxpayer involved in micro captive transactions over a number of past years to which the open statute of limitations applies.
The original deadline for reporting was 30 January, but after pressure from various groups, the IRS granted a 90-day extension, setting the new deadline at 1 May 2017.
After five years of audits and investigations, the IRS should have all the information it needs to spot abusive captive insurance arrangements from legitimate ones, according to King.
King suggested the IRS should publish guidance “narrowly crafted to implicate truly abusive arrangements while exonerating the vast majority of legitimate ones”.
He said: “Failure to provide such guidance by characterising all or even most 831(b) captives as ‘abusive’ is not just bad tax administration, it is an improper attempt by an administrative agency of the executive branch to repeal or nullify an act of Congress.”
Notice 2016-66’s “onerous filing requirements” combined with “chilling penalties for even inadvertent failures”, makes forming and operating a micro captive far more costly and risky for small businesses than it otherwise should and would be.
When implemented, Section 831(b) was intended to “simplify” administration of US tax laws.
The new rules were introduced to reduce the burden on taxpayers by simplifying the previous tax rules, which were deemed “inordinately complex”, and to extend the tax benefits of the small company provision to all eligible small companies, whether stock or mutual.
King said: “The tremendous complexity and burden resulting from the issuance of Notice 2016-66 run directly contrary to an important Congressional purpose behind Section 831(b)—simplification. Notice 2016-66 should be revoked and any future guidance should avoid unnecessary complexity.”
“Honest taxpayers should never be punished by the IRS for biting at the tax carrot that Congress has so carefully dangled in front of them, and it’s improper for the IRS to attempt to poison the carrot.”