IRS makes settlement offer to 831(b) captives under investigation


The Internal Revenue Service is making a time-limited settlement offer to a number of captives that it said “participated in abusive micro-captive insurance transactions.” 

The IRS said it is sending out notices to up to 200 taxpayers, and the eligible captives will be notified by one of these notices, which contains the applicable terms. Those that do not receive such a letter are not eligible, it said. The offer is currently limited to taxpayers with at least one open year under exam, as well as some cases being appealed. But the offer may be broadened in future. 

The settlement requires substantial concession of the income tax benefits claimed by the taxpayer and in most cases will be accompanied by penalties, and comes with a considerable list of terms, including that participating captives must liquidate. 

Each partner, member, and shareholder of each insured entity and the captive must agree to participate in the resolution. The full balance tax balance must be paid, along with applicable penalties and interest upon execution of the closing agreement. And acceptance means taxpayers are not entitled to claim or receive tax benefits arising from captive insurance transactions.

IRS Commissioner Chuck Rettig said it is taking this step in the interests of sound tax administration. “We encourage taxpayers under exam and their advisors to take a realistic look at their matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases. We will continue to vigorously pursue these and other similar abusive transactions going forward.” 

The IRS said it would not listen to any counteroffers. “Taxpayers should not expect to receive better terms in appeals than those offered under this initiative,” it warned. “Taxpayers who are offered this private resolution and decline to participate will not be eligible for any potential future settlement initiatives. The IRS also plans to continue to open additional exams in this area as part of ongoing work to combat these abusive transactions.”

In 2016, the Department of Treasury and IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion. 

Internal Revenue Service, 831(b), Chuck Rettig

Captive International