Abuse of captives included in IRS ‘Dirty Dozen’

Using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on the Internal Revenue Service’s (IRS) annual list of tax scams.

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

The IRS said that one abuse, involving a legitimate tax structure, involves certain small or micro captive insurance companies.

“In the abusive structure, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organisational documents and preparing initial filings to state insurance authorities and the IRS,” it said.

It added that the promoters assist with creating and selling to the entities, often with poorly drafted insurance binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant premiums, while maintaining their economical commercial coverage with traditional insurers.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them," said IRS Commissioner John Koskinen. "The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”