Micro captives stay on IRS Dirty Dozen list

The Internal Revenue Service (IRS) has announced that micro captives remain a part of its annual Dirty Dozen list of financial instruments that it wants taxpayers to avoid.

Also called a small captive, a micro captive is an insurance company whose owners elect to be taxed on the captive's investment income only. 

However, according to the IRS abusive micro captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages. In addition, the “premiums” paid under these arrangements are often excessive, reflecting non-arm’s length pricing.

“Abusive micro captive transactions continue to be a high-priority enforcement area for the IRS,” it said in a statement. “The agency has prevailed in all micro captive Tax Court and appellate court cases decided on their merits since 2017.”

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