The Arizona Captive Insurance Association (AzCIA) has issued a letter to Arizona’s congressional delegation in response to the Internal Revenue Service’s (IRS) letter sent to micro-captive insurance company owners.
Rae Brown, president of the AzCIA, outlined that Arizona has 128 captive insurance companies domiciled in the state, which brings in a total of $640,000 of revenues to the state in the form of annual license fees.
Similar to both Vermont Captive Insurance Association (VCIA) and Utah Captive Insurance Association (UCIA) letters, Brown highlighted the difficult time many businesses are facing due to the COVID-19 pandemic, which is why many “were astonished and frustrated to receive” the IRS letter during “this difficult crisis”.
Brown stated that the letter was sent to businesses four days (20 March) into the national COVID-19 emergency declaration to approximately 150,000 business owners “when many of our businesses are inaccessible or operating at diminished capacity because of the current crisis”.
She said: “Even worse, the IRS Letter requires us to access and report information about our captive insurance programmes by 4 May 2020 or face an increased risk of immediate audit or examination. With stay-at-home orders in place for many states, including Arizona, until 15 May or later, these businesses cannot even access many of these records or comply with the requirement in that short a timeframe.”
The IRS has now pushed the original deadline date of 4 May 2020 back until 4 June 2020.
Brown called on Congress to demand that the IRS “suspend this unnecessary audit and examination activity until at least a year after the national COVID-19 emergency declaration is withdrawn”.
She explained: “Such an action would continue to allow our captive insurance programmes to mitigate the risks that Congress and the tax code allows us to appropriately address. And, such an action is consistent with the extension and suspension of various tax filing deadlines and audit activity for individuals, head of household, and joint tax-filers, along with corporations and self-employed individuals.”
“The IRS already has much, if not all, of this requested information through form 8886, which the IRS has mandated us to file for the past four years”, she added.
Brown acknowledged the IRS’s ongoing concern over certain captives making an election under Section 831(b), but said: “the fact remains that the vast majority of businesses that finance risks using captives are doing the right thing”.
Brown suggested the IRS letter incorrectly makes an assumption that they are somehow doing something wrong.
She said: “This flies in the face of the underlying tax code and is contrary to recent actions taken by Congress as outlined in the PATH Act of 2015, provisions of which the IRS has yet to issue guidance on nearly five years after enactment. This alone should be concerning from a congressional oversight perspective.”
“We hope that you will consider helping us make this request to the IRS and assist in placing additional protective language in future legislative packages that prevent further intimidation by the IRS,” she concluded.