5 January 2021Accounting & tax analysis

IRS considering offering further guidance regarding its position on micro captives

The Internal Revenue Service (IRS) has admitted it is considering whether additional guidance or regulations should be published to clarify its position regarding micro captives and the use of the 831(b) election.

In a letter to the South Carolina Captive Insurance Association (SCCIA), sent in December 2020, the IRS said it had already provided significant guidance regarding contracts issued by companies that have made an 831(b) election, but admitted it is considering offering further clarification.

The IRS was responding to a letter from the SCCIA sent in October 2020 which requested that the IRS withdraw letters sent to the micro captive insurance industry in March, and suspend its audit activities of micro captives until the COVID-19 crisis subsided.

SCCIA also requested that in the future the IRS more carefully focus its examinations of micro captives to those where there was evidence that the benefits provided in section 831(b) have been misused.

It also requested the IRS adopt regulations or guidance regarding its treatment of insurers who have made the 831(b) election to clear up the continuing uncertainty in the industry.

Gary Osborne, president of the SCCIA, welcomed the response from the IRS. “While it is not assertive as we would like, we are pleased that they will give the matter additional consideration,” he said. “The fact they are engaging with us is certainly positive.”

The IRS letter reiterated that taxpayers should consult a tax advisor and notify the tax authority if any micro-captives have discontinued taking deductions or any other tax benefit.