More microcaptive scrutiny after IRS funding boost

Close inspections of microcaptives by the US Internal Revenue Service (IRS) are expected to continue, and potentially ramp up, in light of increased funding for the federal agency.

The 2022 Inflation Reduction Act earmarked an additional $80 billion in funding for the IRS over the next ten years, which it is expected to use to hire 87,000 members of staff, including agents and 200 experienced lawyers.

The implications of this were examined in a CICA 2023 panel session titled ‘Small captive tax audits and litigation – today’s status, tomorrow’s changes’.

The panel consisted of Kacie Dillon, partner at the Law Offices of Woolston & Tarter, Charles Lavelle, partner at Denton Bingham Greenebaum, and Amy Lewis, senior vice president and finance & tax director at Captive Resources.

While the IRS hiring plan appears substantial, the panel said that the agency will have 52,000 members of staff who are eligible to retire or resign over the next decade. So the total number of IRS staff might not increase by the full 87,000 figure.

However, the panel also pointed out that the IRS and its 12 dedicated audit teams are continuing their exhaustive audits of small captive cases and that the IRS approach is ‘constantly evolving’.

There have also been a number of recent legal decisions related to this area, including Reserve Mechanical, with more legal cases being reviewed by the Philadelphia-based Third Court (the Third Circuit Appeals Court), among others.

The panel urged owners of microcaptives, officially termed 831(b) captives, to retain all documentation and to make sure that their captive has been operating correctly as an insurance company and meeting all regulatory requirements.

The panel also pointed out that while the IRS appeared to have reduced its pressure on microcaptives slightly, further pressure might come, perhaps suddenly, and therefore microcaptive owners should watch developments in this area extremely closely.