Abusive micro-captive insurance transactions have long been on the IRS’ radar. And Freeman Law has covered the development of the IRS’s focus on micros for years. (For prior posts from Freeman Law on the topic, see Held Captive: Micro Captive Insurance in the Aftermath of Avrahami, Captive Insurance, and Tax Court Deals a Blow to Micro Captive Insurance Companies.) Since 2014, these transactions have been listed on the IRS’ infamous “Dirty Dozen” list.
In 2016, the IRS issued Notice 2016-66, which generally required taxpayers who were engaged in micro-captive transactions to file certain disclosures with the IRS or risk severe non-disclosure civil penalties under Section 6707A. After a string of wins in the Tax Court, the IRS announced, on September 16, 2019, a limited one-time settlement offer program for taxpayers under examination who participated in these transactions. Taxpayers eligible for settlement have already received their settlement letters from the IRS, and the IRS has announced that “nearly 80%” of such taxpayers opted to accept the settlement terms.
On January 31, 2020, the IRS made another big announcement regarding micro-captives. See IR-2020-26. Specifically, the IRS indicated that it intended to significantly ramp up its compliance efforts, cautioning:
The IRS will continue to vigorously pursue those involved in . . . [micro-captive transactions] going forward. Enforcement activity in this area is being significantly increased. To that end, the IRS is deploying additional resources, which includes standing up 12 new examination teams comprised of employees from the IRS Large Business and International and Small Business/Self-Employed divisions that will be working to address these abusive transactions and open additional exams. These teams will use all available enforcement tools, including summonses, to obtain necessary information.
Examinations impacting micro-captive insurance transactions of several thousand taxpayers will be opened by these teams in the coming months. Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity and imposition of all applicable penalties.
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Taxpayers involved in these abusive transactions should immediately consult with independent, competent tax advisors on the proper treatment for past and future tax years to consider best available options.
Given the substantial risk of additional tax, interest, and civil penalties, taxpayers who have engaged in micro-captive transactions should carefully weigh their options moving forward, particularly due to the limited relief that may be available in the event the IRS initiates a formal examination. To discuss these options, you may contact Matthew Roberts at firstname.lastname@example.org.
For prior posts on captive insurance, see Held Captive: Micro Captive Insurance in the Aftermath of Avrahami, Captive Insurance, and Tax Court Deals a Blow to Micro Captive Insurance Companies.