IRS Makes Settlement Supply to Taxpayers Concerned in ‘Soiled’ Micro-Captive Insurance coverage

The Inner Income Service mentioned it’s mailing a time-limited settlement supply for sure taxpayers below audit who participated in what the IRS calls “abusive micro-captive insurance coverage” transactions.

The IRS has been warning about these micro-captives for a number of years and positioned them on its annual “Soiled Dozen” listing of tax scams.

The IRS has persistently disallowed the tax advantages claimed by taxpayers in these micro-captive buildings and though some taxpayers have challenged the IRS place in court docket, none have been profitable. Following wins in three current U.S. Tax Courtroom circumstances, the IRS mentioned it has determined to supply settlements to taxpayers presently below examination. The IRS mentioned it began sending notices to as much as 200 taxpayers throughout the previous few days. The company mentioned there are greater than 500 circumstances in court docket.

The IRS mentioned this settlement supply requires “substantial concession of the earnings tax advantages claimed by the taxpayer along with applicable penalties except the taxpayer can show good religion, cheap reliance.”

Taxpayers who’re eligible for this supply can be notified by letter with the relevant phrases. Taxpayers who don’t obtain the letter are usually not eligible for this decision.

Tax legislation typically permits companies to create “captive” insurance coverage corporations to guard in opposition to sure dangers. Underneath part 831(b) of the Inner Income Code, sure small insurance coverage corporations can select to pay tax solely on their funding earnings. The IRS contends that promoters, accountants or wealth planners have been persuading homeowners of closely-held entities to take part within the captive insurance coverage schemes that the IRS has argued lack lots of the attributes of real insurance coverage.

Initially, captives have been created to supply protection that was laborious to search out in conventional insurance coverage markets however they’ve expanded properly past that to supply virtually all varieties of insurance coverage. Lots of the largest corporations have at the very least one captive at the moment and so they have additionally change into well-liked amongst smaller and midsized companies, together with skilled providers companies.

The automobiles are well-liked as a result of below tax legislation the homeowners of a small insurance coverage firm pays as much as $1.2 million in tax-deductible premiums. Then, below Part 831(b) of the tax code, any small property/casualty insurer with annual premiums below $1.2 million could select to be taxed on its web funding earnings versus its premium earnings. The choice tax provision utilized by micro-captives can be utilized by small, mutual and rural insurance coverage corporations.

In 2017, the U.S. Tax Courtroom disallowed the “wholly unreasonable” premium deductions the taxpayer had claimed below a bit 831(b) micro-captive association, concluding that the association was not “insurance coverage” below lengthy established legislation (Avrahami v. Commissioner, 149 T.C. No. 7 (2017). In 2018, the Tax Courtroom concluded that the transactions in a second micro-captive association weren’t “insurance coverage.” (Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86).

The IRS has by no means been a fan of captives and didn’t formally acknowledge captives as authentic tax buildings till 2002. In 2008, it proposed after which dropped a bid to change how captives are taxed after lawmakers from Vermont and different states complained. It has additionally questioned cost of what it believes are extreme premiums into captives by some homeowners.

The IRS mentioned it’s going to proceed to disallow the tax advantages involving micro-captives and can proceed to defend its place in court docket. The IRS mentioned it has determined, nevertheless, to supply to resolve sure of those circumstances.

“The IRS is taking this step within the pursuits of sound tax administration,” IRS Commissioner Chuck Rettig mentioned in ready remarks. “We encourage taxpayers below examination and their advisors to take a practical have a look at their matter and thoroughly assessment the settlement supply, which we consider is the most suitable choice for them given current court docket circumstances. We are going to proceed to vigorously pursue these and different comparable abusive transactions going ahead.”

Taxpayers who obtain letters below this settlement supply, however who decide to not take part, will proceed to be audited by the IRS below its regular procedures. The company mentioned potential outcomes could embrace full disallowance of captive insurance coverage deductions, inclusion of earnings by the captive, and imposition of all relevant penalties.

Supply: IRS

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