The Internal Revenue Service (IRS) has named foreign captive insurance to its annual ‘Dirty Dozen’ list of potentially abusive tax arrangements. Following the reinstatement of micro captives on the 2021 list, this year’s series focuses on foreign captive insurance, charitable remainder annuity trusts, foreign pension arrangements, and monetised installment sales. The agency highlights Puerto Rican captive insurance in particular, describing it as an arrangement where US owners of closely-held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans. The US-based individual or entity claims deductions for the cost of insurance coverage provided by a fronting carrier, which then reinsures the coverage with the foreign corporation. The IRS says: “The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm's-length pricing, and lack of business purpose for entering into the arrangement.” The IRS says it will focus on eight additional scams as it continues to publish its list of “abusive” transactions to both average taxpayers, higher-income individuals, and financial institutions.
