The IRS is spreading fear, uncertainty and doubt about the captive industry in an effort to increase its own revenues, according to Sean King, principal of CIC Services.
King was referring to a letter, written by the IRS, that appears to have been widely distributed among US captives that complied with Notice 2016-66, which required additional disclosures about captive transactions.
King said: “Despite having nearly three years to analyze the data, the IRS has yet to issue any substantive guidance to taxpayers. The IRS has clearly concluded that it can raise more revenue by spreading fear, uncertainty and doubt than by offering guidance, guidance that most all taxpayers would certainly follow.”
King accused the IRS of intentionally being unclear about its views on captives, so that it can “arbitrarily attack most any captive insurance transaction as illegitimate in an attempt to extort a settlement from the taxpayer.”
Offering clear guidance that taxpayers could actually follow would deprive it of such an opportunity, he added.
The IRS’ letter reaffirms the IRS’ view that some captive insurance companies are illegitimate, and warns it will step up audit enforcement of captive insurance transactions. But it is unspecific, King said, and does not indicate that the recipient has been found lacking or non-compliant in any way, or even that it's suspected of being so.
He argued that the IRS is attempting to persuade taxpayers to voluntarily cease participation in captive insurance transactions, even if they are legitimate, by implying that such taxpayers may, by doing so, avoid an audit. It is rushing these efforts, King added, because it understands it may lose some upcoming cases that are pending in tax court that involve relatively strong captive insurance structures.
If the IRS loses any forthcoming cases against captive structures, that will clear up some of the fear and doubt that has emerged in the industry since the IRS won three cases in succession against relatively weak captive structures, King said, which “will deprive the IRS of psychological leverage over those taxpayers still operating legitimate arrangements.”
IRS, Internal Revenue Service, Sean King, CIC Services, Notice 2016-66