17 January 2014

Captives can expect more IRS attention

The US Internal Revenue Service is gunning for captives but not necessarily coming away with victories. This is the opinion of Alex Webb, chairman of the North Carolina Captive Association and partner at Webb & Coyle.

Citing the example of a colleague who faced 26 captive audits and settled each successfully he said: “they might be attacking more, but they aren't winning more.”

Webb also mentioned Rent A Center, Inc v Commissioner of Internal Revenue, a case decided on January 14th in favour of the taxpayer. The courts found that the insurance policies at issue did in fact shift risk to a captive, which was “formed for a valid business purpose; was a separate, independent, and viable entity; was financially capable of meeting its obligations; and reimbursed [the parent company’s] subsidiaries when they suffered an insurable loss”.

“A victory is a victory,” Webb said. “This decision strengthens the taxpayer's position and provides needed guidance."

While the IRS’s decision not to issue a private letter ruling to an offshore captive last year—the agency questioned whether a pooling arrangement actually constituted risk shifting and risk distribution, amongst other queries—was not an attack, according to Webb, it did perhaps indicate that the Service would be focusing more on exams.

Webb said: “going dark on private letter rulings in this area doesn't necessarily constitute a horrible attack. But if you ask tax lawyers if attacks are coming, well, yes, they are—audits are ramping up. I think they’re going to come at captives harder in the future.”

The increased frequency of audits, particularly of captives domiciled in offshore jurisdictions, is driving a sense of anxiety in the captive management community, Webb told Captive International. Some managers have expressed concerns around FATCA and the possibility being audited simply for existing offshore.

He added: “I would say in the captive management community there seems to be a higher level of fear than is warranted. I don’t see FATCA as eliminating the possibility of using an offshore domicile—you just have to be more careful and prepared to make the disclosures that law requires. But if managers want to bring 30 captives from a Caribbean island to North Carolina I’m not going to talk them out of it.”

Read more about Rent A Center, Inc v Commissioner of Internal Revenue here.