DC bureaucrats have already tried de-banking crypto – now they’re after small businesses’ insurance

In an op-ed for Captive International, Ryan Foncannon (pictured), founder and managing partner of S.W.A.N. Virtual Family Office, issues a call for action on micro-captives.

We’ve seen this playbook before. The original Operation Choke Point was an Obama-era scheme applying regulatory pressure to lawful businesses that federal bureaucrats didn’t like introduced without congressional authorisation. Banks weren’t directly ordered to de-bank controversial industries such as gun manufacturers or payday lenders, but they were subjected to scrutiny, making it easier simply to cast them aside.

Former President Biden’s administration spun up a similar effort, known as Operation Choke Point 2.0, against the crypto industry. Regulators didn’t ban crypto but made it difficult for companies to operate by treating the entire industry as a risk, discouraging financial institutions from providing services. The goal wasn’t reasonable regulatory frameworks – it was elimination by harassment.

Thankfully, much of this has come to light, and members of Congress are pushing back. Senator Tim Scott (R-SC) has been a leader against the federal government’s war on crypto and de-banking more generally. During a hearing with Fed Chairman Jerome Powell earlier this year, he pressured Powell to oppose financial regulators abusing their power to de-bank legal industries.

He also introduced legislation to remove “reputational risk” as a criterion federal regulators can use in supervision. Sen. Scott has stated de-banking is “discriminatory and un-American”. I agree, and I believe this principle applies just as much to small business insurance as it does to digital assets.

Unfortunately, under former President Biden, the IRS tried the same strategy with micro-captive insurance arrangements, a vital risk management tool for small and mid-sized businesses.

A captive insurance company is a wholly owned subsidiary that businesses set up to insure its own risks, often to fill gaps in traditional insurance coverage. As part of President Reagan’s 1986 tax reform, Congress created section 831(b) of the tax code, allowing “micro-captives” – smaller captive structures that let businesses insure against risks commercial insurers might ignore or misprice.

Micro-captives are useful for industries with limited mainstream coverages, allowing businesses to customise their coverage, keep premiums down and retain control. And unlike traditional insurance, micro-captives can insure specific risks many commercial carriers don’t, or that are prohibitively expensive, such as supply chain disruptions and cyber threats.

Congress explicitly authorised micro-captive insurance, and thousands of businesses use it legally right now. But the IRS has decided it doesn’t like it and has spent the past several years trying to eliminate it.

The IRS’s war on micro-captives has followed the Operation Choke Point 2.0 playbook, using regulatory branding and aggressive enforcement tactics to eliminate an industry it flat-out doesn’t like.

For example, the IRS issued final regulations on micro-captives right before President Biden left office, with loss ratio “triggers” that mark them as “transactions of interest” or ”listed transactions”. These designations signal the agency considers those participating in the transaction to be guilty of tax avoidance unless proven innocent, or that the IRS believes are guilty of tax avoidance but lacks sufficient evidence.

The agency has also launched aggressive audit dragnets, forcing business owners into expensive legal battles drawn out over several years. Companies are left in limbo, spending enormous sums to defend themselves, with the IRS hoping they will give in rather than stick it out.

This creates an environment where banks, tax professionals and others hesitate to work with micro-captives out of fear of IRS scrutiny. Just as regulators and the IRS have never tried to ban crypto but simply made it more and more difficult to exist, the IRS doesn’t need to outlaw micro-captives, only to create sufficient legal uncertainty and financial risk that small businesses and support services industries abandon them.

The IRS regulations and enforcement actions against micro-captives aren’t about tax law – they’re about bureaucrats deciding that lawful risk management strategies shouldn’t exist and regulating them until they don’t. If unelected D.C. bureaucrats can do this to micro-captives or cryptocurrency companies, they can do it to any other industry, too.

I’m calling on Congress and the Trump administration to revisit these rules. As economic uncertainty looms, especially for small and mid-sized businesses, affordable insurance options are critical. Allowing the IRS’s regulations on micro-captives to persist will put the risks these captives were designed to manage back on the shoulders of small business employers nationwide.

Ryan Foncannon is the founder and managing partner of S.W.A.N. Virtual Family Office. You can find a link to his site here

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.