11 April 2023Analysis

IRS examines micro-captives again

The Internal Revenue Service (IRS) in the US has issued a document that contains proposed regulations relating to micro-captives.

The IRS document (‘Micro-captive Listed Transactions and Micro-captive Transactions of Interest’) seeks to identify transactions that are the same as, or substantially similar to, certain micro-captive transactions as listed transactions, a type of reportable transaction, and certain other micro-captive transactions as transactions of interest, another type of reportable transaction.

Last week the IRS finalised its annual Dirty Dozen list of tax scams for 2023, which included certain forms of micro-captives.

However, David Slenn, partner at law firm Akerman, told Captive International that the case may not set a precedent for how the IRS might respond should similar issues arise elsewhere.

“I think the IRS decided it might not be worth the effort given that particular Circuit previously ruled the IRS did not comply with the APA [Administrative Procedure Act] in another reportable transaction case,” he said.

In October it was announced that the IRS would not challenge the decision by a Tennessee federal court setting aside an agency notice requiring the disclosure of microcaptive insurance arrangements, according to an order from the Sixth Circuit.

“However, the IRS can certainly attempt to fight in other Circuits,” Slenn added. “The Treasury Department and IRS might also decide enough information has been gathered to ‘de-TOI’ 2016-66 (as opposed to ‘delisting’ a listed transaction) and perhaps (among other options) amend the regulations to create a new category for micro-captives as a reportable transaction and/or require certain information be included with a tax return.

“After issuing Notice 2008-99, which characterised as a transactions of interest certain transactions involving charitable remainder trusts, the IRS de-TOI’d the CRT transaction in 2015 and amended the regulations to provide special rules for the CRT transaction.

“By taking similar action with Notice 2016-66, the IRS will presumably engage in the required notice and comment rulemaking procedure for the proposed amendment. Regardless of how the IRS responds to the procedural issues associated with Notice 2016-66, it will continue to aggressively pursue certain micro-captive programs on substantive grounds, as none of the APA issues had anything to do with the merits of the transaction.”