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1 December 2016Accounting & tax analysis

Exclusive: CI survey highlights captive doubts on new IRS reporting regime

The captive insurance industry has grave concerns about Notice 2016-66, the new reporting regime put into place by the Internal Revenue Service in the US, an exclusive survey carried out by Captive International has revealed.

The new reporting requirements, effective from November 2016, identify certain captive insurance transactions where certain persons involved with the transaction must disclose their involvement to the IRS.

The IRS has expressed concern previously that some companies present a risk of abuse – especially if the company and the policyholder are related – due to a business policyholder still being able to deduct premiums paid to an insurance company.

Asked if Notice 2016-66 would have an impact on the captive industry, 100 percent of respondents said that yes, it would. However, their comments on the potential impact varied from respondent to respondent.

One said that the new reporting regime will stop the formation of ‘quasi’ captives, whilst another said that it will raise the costs of administration and discourage some from electing the 831(b) exemption.

According to one respondent: “It will hopefully drive out the ‘Johnny Come Lately’ estate planning promoters who are solely selling captives as a tax avoidance strategy and not as a legitimate risk financing strategy as captives were originally intended.”

This point was raised by others. One said that many captive formations are driven by tax benefits, and that the effect of this Notice is to reduce such activity, whilst another said that the IRS uses scare tactics such as this to influence the decision of financial advisors when reviewing the pros and cons of establishing a captive.

One respondent took a different stance, stating that more regulation is never good, as it provides yet another opportunity for IRS review.

However, another said that the notice had be brought in because of the slow initial growth of 831b and that it was necessary to weed out bad apples in order to provide certainty going forward so that growth can then continue.

The final comment was in many ways the bleakest. The respondent said: “I believe there will be a gross misunderstanding regarding the Notice. We have already seen several potential captive candidates back away because of the Notice. They don't want to take the time to figure out how to complete Form 8886.”