831(b) Institute joins call for repeal of IRS micro-captive regulations
The 831(b) Institute, along with more than two dozen leading organisations representing small businesses, captive insurance companies, banks, and taxpayer advocates, have submitted a formal letter to the US Department of the Treasury and the Internal Revenue Service (IRS) calling for the immediate repeal of recently finalised regulations that targets small captive insurance companies, also known as micro-captives.
The final rule, issued in January 2025 and set to take effect on July 31, 2025, classifies many legitimate small captive insurance arrangements as “listed transactions” or “transactions of interest” – exposing small businesses and their advisors to excessive compliance costs, legal risk, and even potential criminal penalties.
“The IRS’s final rule threatens to dismantle a critical tool used by small businesses to manage risk when commercial insurance is insufficient, unavailable, or unaffordable,” said Dustin Carlson, president of the 831(b) Institute. “What’s worse is that this rule disregards congressional intent and violates the Administrative Procedure Act while relying on a flawed understanding of small captive insurance.”
The National Taxpayers Union (NTU) also commented on its decision to co-sign the letter, with NTU President Pete Sepp stating, “The National Taxpayers Union has worked for over 50 years to support a tax system that enables prosperity for all and respects taxpayers’ civil rights. The final rule on micro-captives issued earlier this year violates those principles and creates policy precedents that could harm taxpayers in many situations. We hope the IRS and Treasury Department will take these concerns to heart.”
The coalition’s letter points out that:
• The rule imposes new ownership diversification requirements and loss ratio thresholds that are not supported by insurance industry data or statutory authority.
• It suffers from many of the same legal issues found in IRS Notice 2016-66, which was vacated in federal court for violating administrative law.
• It directly contradicts the intent expressed by Congress in the reforms passed as part of the PATH Act of 2015, which affirmed the role of 831(b) captives and rejected IRS efforts to repeal them.
These concerns were echoed by Michael Adelman, chief executive of the Ohio Bankers League, another letter signatory. “These rules ignore the fact that low claims frequency doesn’t mean an arrangement is abusive. Instead, it may just mean the risk didn’t materialise. Punishing banks for developing strong risk controls and not suffering losses undermines legitimate risk management and threatens access to insurance coverages our members can’t get anywhere else.”
As noted in the letter, small captive insurance companies help small and mid-sized businesses protect themselves in the face of rising premiums, increasing coverage exclusions, and growing risks, from cyberattacks to natural disasters. The letter argues that the IRS’s actions are part of a long-running pattern of enforcement overreach that punishes legitimate businesses alongside bad actors.
The 831(b) Institute stated that it would like to reiterate its willingness to work with the IRS on targeted reforms but notes that the current rule must be repealed before its effective date of July 31 to avoid serious harm to small businesses.
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