Foreign captive insurance schemes on IRS Dirty Dozen list

The Internal Revenue Service (IRS) has started to unveil its Dirty Dozen list for 2022, which includes foreign captive insurance schemes that it says that taxpayers should avoid.

The Dirty Dozen are transactions that the IRS said are wrongfully promoted and will likely attract additional agency compliance efforts in the future.

The first four on the list are charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetised instalment sales.

The IRS is specifically warning about Puerto Rican and other foreign captive insurance schemes. In these transactions, US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the US owner has a financial interest. The US based individual or entity claims deductions for the cost of insurance coverage provided by a fronting carrier, which reinsures the coverage with the foreign corporation.

According to the IRS the characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered, non-arm's-length pricing, and lack of business purpose for entering into the arrangement.

“Taxpayers should stop and think twice before including these questionable arrangements on their tax returns,” said IRS Commissioner Chuck Rettig. “Taxpayers are legally responsible for what's on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know they can trust.”

The IRS is set to announce eight additional scams, with some focused on the average taxpayer and others focused on more complex arrangements that promoters market to higher-income individuals.

“A key job of the IRS is to identify emerging threats to compliance and inform the public so taxpayers are not victimized, and tax practitioners can provide their clients the best advice possible,” Rettig said. “The IRS views the four transactions listed here as potentially abusive, and they are very much on our enforcement radar screen.”

The IRS reminded taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves.

It also calls on taxpayers, tax professionals and financial institutions to be especially vigilant and watch out for all sorts of scams from simple emails and calls to highly questionable but enticing online advertisements.