The Vermont Captive Insurance Association (VCIA) has sent a letter to Steven Mnuchin, secretary of the Department of the Treasury and Charles Rettig, commissioner of the Internal Revenue Service (IRS) in response to the service’s recent letters concerning micro-captives.
Rich Smith, president of the VCIA, explained that the letter came at a “time of extraordinary circumstances as every organisation including the federal government, is struggling to endure the pandemic crisis we now face”.
Smith explained that insureds need insurance coverages to protect them in the struggling economy. He stressed: “The letter’s intimidating and draconian questioning regarding the legitimacy of the small company insurance industry is insensitive at best.”
He added that VCIA is aware of the IRS’ concerns that some entrepreneurs may be using micro-captives for purposes other than to insure owners against the risk of loss.
Although Smith said the IRS has rightfully gone after such micro-captives, he explained that “hundreds of small insurers that are engaged in legitimate insurance services; thus, the industry should not be indicted with a broad brush as the IRS letter does”.
Smith argued that the IRS should issue regulations or guidance to clarify issues surrounding section 831(b).
US Congress recognises the importance of supporting small insurance companies and enacted Section 831(b) of the Internal Revenue Code to encourage and support such small insurers, the letter noted.
Smith also stated that Congress recently reaffirmed its support of these insurance companies by raising the allowable premium volume to make an 831(b) election from $1.2 million to $2.2 million and indexing that amount going forward.
In conclusion on his letter, Smith said: “We request that the IRS withdraw this letter and suspend its audit activities of micro-captives until the COVID-19 crisis is over and the nation’s economy is on the road to recovery."
"We also request that the IRS, when it resumes its examination of “micro-captives”, take a more appropriate approach focusing on those organisations that show evidence of malfeasance, and not to condemn an entire industry,” he added.