Micro captive letter raises serious concerns about IRS tactics: VCIA

The Vermont Captive Insurance Association (VCIA) has written to Steve Mnuchin, the US Secretary of the Treasury, and Paul Rettig, the Commissioner for Internal Revenue, calling on the Internal Revenue Service (IRS) to suspend its audit activities of micro captives.

IRS investigations of micro captives should not resume until the COVID-19 crisis is over and the US economy is recovering, said Richard Smith, president of the VCIA, who wrote the letter.

He also called on the IRS to withdraw the letter it sent to micro captives, dated March 20, which he said “raises serious concerns about the tactics of the IRS”, and to issue regulations or guidance related to micro captives.

When it does resume its investigations into micro captives, the IRS should “take a more appropriate approach, focusing on those organisations that show evidence of malfeasance, and not to condemn an entire industry,” Smith added.

Smith noted that, by enacting section 831(b) of the Internal Revenue Code to encourage and support such small insurers, and then raising the allowable premium volume to make an 831(b) election from $1.2 million to $2.2 million, Congress has demonstrated its support for micro captives.

He noted the IRS letter had been received at a time of extraordinary circumstances, when many businesses are struggling to endure the COVID-19 pandemic. “Insureds need their insurance coverages to protect them in the struggling economy and the letter’s intimidating and draconian questioning regarding the legitimacy of the small company insurance industry is insensitive at best,” Smith said.

Smith acknowledged “the concern of the IRS that some entrepreneurs may be using micro-captives for purposes other than to insure their owners against risk of loss,” which he admitted the IRS is right to pursue.

But Smith stressed hundreds of small insurers use the structures legitimately and “should not be indicted with a broad brush, as the IRS letter does.”