Participants in abusive micro-captive insurance arrangements should exit these transactions as soon as possible, Internal Revenue Service (IRS) officials have warned.
The IRS has stepped up examinations of micro captive insurance arrangements, on the back of its victory against Caylor Land and Development in the US Tax Court on March 10, 2021, in which a micro-captive arrangement failed to qualify as insurance for federal tax purposes.
IRS Commissioner Chuck Rettig noted that judges have now dismissed a number of micro-captives as not being insurance in the commonly accepted sense on a number of occasions. "I strongly urge participants in these arrangements to get independent legal advice separate from those who helped steer them into these abusive arrangements," he said.
The Caylor case saw the court sustain the IRS's determination of accuracy-related penalties and reject the taxpayer's claim of reliance on tax advice.
In 2020, the IRS deployed 12 newly formed micro-captive examination teams to increase its ability to examine abusive micro-captive insurance transactions. The IRS said it will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability on foreign captives. It will continue to assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance.
In Notice 2016-66, the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as "transactions of interest." The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006 and created disclosure and list maintenance obligations for material advisors.
In March and July 2020, the IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly.
Internal Revenue Service, IRS, Caylor Land and Development, Chuck Rettig, Micro captive