Settle now or face even bigger fines, IRS tells micro-captive owners
The Internal Revenue Service is turning up the pressure on micro-captive insurance schemes that it deems abusive, warning those that do not settle now are likely to incur additional penalties later.
The IRS has set a filing deadline of October 15 and called for businesses to consult an independent tax advisor if they participated in a micro-captive insurance transaction.
It warned this included companies who set up offshore captive insurance companies, as opposed to onshore section 831(b) captives.
“This and other variations appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions,” the IRS said. “The IRS is aware of these abusive transactions and is actively working to counter their proliferation.”
Taxpayers that have entered micro-captive transactions “should seriously consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions,” the IRS said.
“The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or chief counsel on terms more favorable than previously announced settlement offers,” it said in a statement. “Any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.”
This will involve disallowing tax benefits from transactions that are determined to be abusive, and demanding premium payments in income from domestic captives. It also threatened to assert a withholding liability for foreign captives, and to impose penalties, including the strict liability penalty that applies to transactions that lack economic substance.
IRS Commissioner Chuck Rettig pointed to the IRS’ expanding resources in the fight against fraud, which includes a new Fraud Enforcement Office. It has also expanded its coordination with Criminal Investigation and the Office of Professional Responsibility, and invested in advanced data analytics and mining capabilities.
“Any future settlement terms will only get worse, not better,” Rettig warned.
Abusive micro-captives have been a concern to the IRS for several years, having appeared on the IRS Dirty Dozen list of tax scams since 2014. In 2016, the Department of Treasury and IRS issued Notice 2016-66 that identifed certain micro-captive transactions as having the potential for tax avoidance and evasion.
In March and July 2020 the IRS issued letters to taxpayers who participated in a Notice 2016-66 transaction alerting them that IRS enforcement activity in this area will be expanding significantly.