IRS steps up fight against abusive micro-captive transactions
The Internal Revenue Service (IRS) is establishing 12 new examination teams as it steps up its efforts to pursue abusive micro-captive insurance transactions.
The teams comprise employees from the IRS large business, international and small business/ self-employed divisions. They will pursue taxpayers that did not accept a recent IRS settlement offer to suspected offenders, and open additional examinations, using all available enforcement tools, including summonses, to obtain necessary information.
The IRS said it will open examinations impacting micro-captive insurance transactions of several thousand taxpayers in the coming months, vowing to “vigorously pursue those involved in these and other similar abusive transactions going forward.”
Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity and imposition of all applicable penalties.
According to the IRS, nearly 80 percent of taxpayers who received its settlement offer elected to accept it. This required substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties. IRS commissioner Chuck Rettig said this demonstrated its success in fighting abusive micro-captive insurance transactions.
"Taxpayers who elected to accept the IRS' terms have done the right thing by coming into compliance with their federal tax obligations and putting this behind them. Putting an end to abusive schemes is a high priority for the IRS,” Rettig said.
The IRS has been concerned about abusive micro-captives for several years, having named these transactions on its Dirty Dozen list of tax scams since 2014. In 2016, the Department of the Treasury and IRS issued Notice 2016-66, identifying certain micro-captive transactions as having the potential for tax avoidance and evasion.
Three US Tax Court decisions have confirmed that certain micro-captive arrangements are not eligible for federal tax benefits.