The Internal Revenue Service (IRS) has revealed that 80 percent of taxpayers who received offer letters elected to accept the settlement terms.
In September last year, the IRS mailed a time-limited settlement offer for certain taxpayers under audit who participated in ‘abusive’ micro captive insurance transactions.
The IRS is also establishing 12 new examination teams comprised of employees from the IRS large business/self-employed divisions that will be working to address these abusive transactions and open additional exams.
The teams will use all available enforcement tools, including summonses, to obtain necessary information.
The settlement offer followed three US Tax Court decisions confirming that certain micro-captive arrangements are not eligible for federal tax benefits.
The terms of settlement required substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties.
IRS Commissioner Chuck Rettig said: “The overwhelming acceptance rate of the private settlement offer is a reflection of the success of the government’s work to stop this abuse.”
“Taxpayers who elected to accept the IRS’ terms have done the right thing by coming into compliance with their federal tax obligations and putting this behind them. Putting an end to abusive schemes is a high priority for the IRS,” he added.
Micro captives have come under scrutiny by the IRS for several years, appearing on the IRS’ ‘Dirty Dozen’ list of tax scams since 2014.
In 2016, the Department of Treasury and IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.
The IRS has recently won three court cases against captive companies regarding tax. Following these cases, the IRS has decided to offer settlements to taxpayers currently under exam.
Tax law allows businesses to create captive insurance companies to protect against certain risks.
Under section 831(b) of the Internal Revenue Code, certain small insurance companies can choose to pay tax only on their investment income.
In abusive micro captive structures, promoters, accountants or wealth planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of genuine insurance.