Abusive micro-captive transactions still a 'high priority' for IRS
The US Internal Revenue Service has warned taxpayers against promoters selling bogus tax strategies and fraudulent offshore schemes, including micro-captive insurance arrangements.
The IRS wrapped up its 2024 Dirty Dozen campaign with the warning, saying the schemes may also have an international aspect, such as concealing money and digital assets in foreign accounts or using foreign captive insurance.
“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” said IRS Commissioner Danny Werfel. “Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”
A statement released on the last day of the Dirty Dozen campaign said abusive micro-captive transactions continue to be a high-priority enforcement area for the IRS.
"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," the statement said. "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.
The agency has prevailed in all micro-captive Tax Court and appellate court cases decided on their merits since 2017, the IRS said.
The Foreign Account Tax Compliance Act (FATCA) plays a key part in combating tax evasion by US persons holding accounts and other financial assets offshore. It requires most US taxpayers holding financial assets outside the United States to report those assets to the IRS. It also requires certain foreign financial institutions to report directly to the IRS about financial accounts held by US taxpayers. These institutions include not only banks, but also other financial institutions, such as investment entities, brokers and certain insurance companies. Reporting requirements carry penalties for failure to file.
"Whether anchored offshore or in the US, abusive transactions and schemes remain a high priority for the IRS," the agency said. "The IRS is always on the lookout for promoters and participants of these types of schemes and where appropriate, the IRS will challenge them and impose penalties."
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