IRS to take “Next Step” on Abusive Micro-Captive Transactions

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Matthew L. Roberts

Matthew L. Roberts

Principal

469.998.8482
mroberts@freemanlaw.com

Mr. Roberts is a Principal of the firm. He devotes a substantial portion of his legal practice to helping his clients successfully navigate and resolve their federal tax disputes, either administratively, or, if necessary, through litigation. As a trusted advisor he has provided legal advice and counsel to hundreds of clients, including individuals and entrepreneurs, non-profits, trusts and estates, partnerships, and corporations.

Having served nearly three years as an attorney-advisor to the Chief Judge of the United States Tax Court in Washington, D.C., Mr. Roberts leverages his unique insight into government processes to offer his clients creative, innovative, and cost-effective solutions to their tax problems. In private practice, he has successfully represented clients in all phases of a federal tax dispute, including IRS audits, appeals, litigation, and collection matters. He also has significant experience representing clients in employment tax audits, voluntary disclosures, FBAR penalties and litigation, trust fund penalties, penalty abatement and waiver requests, and criminal tax matters.

Often times, Mr. Roberts has been engaged to utilize his extensive knowledge of tax controversy matters to assist clients in their transactional matters. For example, he has provided tax advice to businesses on complex tax matters related to domestic and international transactions, formations, acquisitions, dispositions, mergers, spin-offs, liquidations, and partnership divisions.

In addition to federal tax disputes, Mr. Roberts has represented clients in matters relating to white-collar crimes, estate and probate disputes, fiduciary disputes, complex contractual and settlement disputes, business disparagement and defamation claims, and other complex civil litigation matters.

IRS to take “Next Step” on Abusive Micro-Captive Transactions

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 mroberts@freemanlaw.com.

 

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.

 

 

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Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3410 to discuss our tax representation services.

 

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