6 April 2023Analysis

Abusive captives highlighted in IRS Dirty Dozen list

The Internal Revenue Service (IRS) has finalised its annual Dirty Dozen list of tax scams for 2023 with a reminder for taxpayers, businesses and tax professionals to watch out for these schemes throughout the year, not just during tax season.

Many of these schemes peak during filing season as people prepare their tax returns. In reality, these scams can occur throughout the year as fraudsters look for ways to steal money, personal information, data and more.

To help people watch out for these scams, the IRS and the Security Summit partners are providing an overview recapping this year's Dirty Dozen scams.

The overview contains two areas of particular interest for the captive market.

The first is micro-captive insurance arrangements. A micro-captive is an insurance company whose owners elect to be taxed on the captive's investment income only. The IRS said that 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.

The second is Puerto Rican and foreign captive insurance. US business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the US business owner has a financial interest. The US business owner (or a related entity) claims a deduction for amounts paid as premiums for ‘insurance coverage’ provided by a fronting carrier, which reinsures the coverage with the Puerto Rican or other foreign corporation. Despite being labelled as insurance, these arrangements lack many of the attributes of legitimate insurance.

"Scammers are coming up with new ways all the time to try to steal information from taxpayers," said IRS Commissioner Danny Werfel. "People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams. And people should always remember to be wary if a tax deal sounds too good to be true."

Working together as the Security Summit, the IRS, state tax agencies and the nation's tax industry, including tax professionals, have taken numerous steps since 2015 to warn people about common scams and schemes during tax season and beyond that can increase the risk of identity theft. The Security Summit initiative is committed to protecting taxpayers, businesses and the tax system from scammers and identity thieves.