The IRS should clarify guidance on offshore micro-captive audits and establish a formal review system for its investigations, according to a report by the US Government Accountability Office (GAO).
The legislative branch government agency, which provides nonpartisan information to Congress, found that the IRS could improve its audits and investigations of micro-captives.
“Offshore insurance has legitimate uses but also can be structured to hide US taxpayers’ assets or falsely claim tax benefits,” the report states. “Treasury and IRS have opportunities to better solicit public input on certain guidance, including for offshore insurance, as GAO recommended in its April 2021 report. Treasury neither agreed nor disagreed with the recommendation, but GAO maintains that the recommendation remains valid.”
While IRS officials said that current oversight practices were sufficient to ensure that micro-captive audits were conducted accurately, the GAO states that the application of its review approaches “could be enhanced”.
“For example, SB/SE’s [the Small Business and Self Employed Division] managers have little guidance in the Internal Revenue Manual for when an audit should be subjected to managerial review and Large Business and International Division (LB&I) managers lack systems through which to record and analyse certain managerial reviews,” the report reads. “By clarifying guidance and establishing a formal review system, SB/SE and LB&I would have better assurance that they are effectively auditing micro-captive insurance.”
It also finds that IRS oversight of its investigations of micro-captive promoters lacks a “systematic method” to evaluate their effectiveness.
“For example, SB/SE lacks a systematic method to identify micro-captive promoter investigations for quality review. From fiscal years 2016 through 2020, LB&I did not apply quality reviews to any micro-captive insurance promoter investigations. Conducting formal reviews more systematically would better assure the quality of IRS’s promoter investigations on micro-captive arrangements.”
Recommendations include more specific guidance from the Commissioner of Internal Revenue on when SB/SE should use various managerial review tools and their frequency; adoption of a formal quality review process for a sample of micro-captive insurance audits; and formal managerial reviews of LB&I’s micro-captive insurance promoter investigations.
It concludes: “IRS disagreed with the recommendations, stating that its current procedures are sufficient and citing resource constraints. However, GAO maintains that IRS’s procedures should be refined and can be done so with minimal use of resources.”
IRS, micro captives, recommendations, investigationa