The Self-Insurance Institute of America (SIIA) has “respectfully requested” in a letter to the Internal Revenue Service (IRS) that it suspends Notice 2016-66, because it is “premature”.
The letter, sent by SIIA on 30 January, has been put together to “provide a balance that allows Congressional intent to move forward while providing the IRS a means to obtain the information that it desires”.
It suggested that the notice unnecessarily imposes an onerous burden and potentially steep price in the form of excessive reporting requirements and huge penalties, on numerous innocent parties and legitimate 831(b) captives.
According to SIIA, based on the actions taken by Congress through the passage of the Protecting Americans from Tax Hikes Act (PATH Act), it remains the institute’s view that Congress is supportive of businesses using captives appropriately. However it urged against rushing the notice through.
The letter said: “We recognise that not all participants in the small captive industry are acting appropriately and the IRS plays an important role in enforcing Congress’s intent.”
The IRS’s Notice 2016-66, released on 1 November, formally labelled micro captive transactions as “transactions of interest”.
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 stated purpose in the notice for collecting this additional information from taxpayers is that “the Treasury Department and the IRS lack sufficient information to identify which 831(b) arrangements should be identified specifically as a tax avoidance transaction and may lack sufficient information to define the characteristics that distinguish the tax avoidance transactions from other 831(b) related-party transactions”.
On 29 December the IRS granted a 90-day deadline extension for 831(b) captives that need to comply with Notice 2016-66.
There are two “significant events” expected this year: the issuance of guidance on the PATH Act revisions to 831(b); and the Tax Court ruling on the lead 831(b) case, Avrahami, that could bring some clarity around rules for the captive insurance industry.
The letter said: “In the light of PATH Act guidance and an appropriate period to ascertain the impact of the Avrahami decision, the IRS will be in a better position to decide what features of a 831(b) captive arrangement amount to a transaction of interest and whether information already being collected by the IRS on annual tax returns and accompanying annual statements is sufficient to identify the transactions of interest.”
“Such an approach will prevent finite IRS resources from being expended on reviewing information that may not be germane to the issues, or reviewing duplicates of information already in the IRS’s possession. This approach will also prevent an enormous amount of administrative burden and cost from being placed on the industry.”
SIIA also noted that there should be an “appropriate review” of whether a captive’s annual tax return and annual statement requirements may be modified so that tax payers and that the IRS can provide and review this information in one place, avoiding duplication.
If the IRS does proceed with the notice, SIIA has requested that items should be revised to “reflect the characteristics espoused by the courts and that the IRS allow this information to be provided in an aggregated manner”.
The letter added that the notice should move through the normal regulatory process, including an appropriate public comment period.
SIIA has also asked for captives currently under IRS audit to be exempt, at least with respect to the years being audited.
The letter explained: “In these cases, the IRS is already collecting thousands of pages of information, including the same information required under the notice. If there are open years for the taxpayer that are not under audit, Form 8886 could be required for those years.”