IRS Settlement: Micro-Captive Insurance Schemes

Companies often form what are known as “captive insurance companies” to protect themselves against loss. They create these companies themselves, invest their own money into them, and then use that money as insurance in case of liability, such as if they are sued or have to settle a dispute with a worker.

Unfortunately, many unethical businesses have used captive insurance companies to hide assets or to avoid paying their taxes. The Internal Revenue Service is cracking down on these practices, and it has been auditing many companies suspected of using micro-captive insurance companies for tax fraud or evasion. The IRS just announced that it would offer a settlement to certain taxpayers who are currently under audit for abusive micro-captive insurance practices.

Abusive Practices

Tax law allows companies to create captive and micro-captive insurance companies to protect themselves against risk. Section 831(b) of the Internal Revenue Code allows businesses to pay tax only on the interest generated by their investments in these companies. Because of this tax advantage, many companies seek to use these micro-captive companies in the wrong way.

For example, accountants and financial planners can help companies to put money into what is deemed to be a micro-captive insurance company, yet this company does not have the necessary attributes of being an insurance company. The company provides insurance in name only. Its real purpose is to be a tax shelter.

When the IRS discovers these abusive practices, it disallows the tax benefits the company claims. Depending on the circumstances, the IRS can also seek penalties for the abusive practices.

Taking Advantage of the Settlement

All who are eligible to take advantage of the settlement will be notified by a letter from the IRS. Those who are not eligible will not receive a letter. Therefore, the IRS is not issuing a list of eligibility criteria and awaiting applications.

The IRS said that it will be sending notices to as many as 200 people who are eligible for the settlement.

“The IRS is taking this step in the interests of sound tax administration,” IRS Commissioner Chuck Rettig said in a press release about the settlement. “We encourage taxpayers under exam and their advisors to take a realistic look at their matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases. We will continue to vigorously pursue these and other similar abusive transactions going forward.”

Prosecuting Abuse

The IRS has been targeting abuse of micro-captive insurance companies for some time now. In 2014, these schemes were listed on the “Dirty Dozen” list of tax scams that the IRS issued, and the IRS included micro-captive insurance schemes in Notice 2016-66 that it issued in 2016.

Some taxpayers have challenged the IRS when it disallowed tax benefits under micro-captive insurance companies, but the IRS has consistently prevailed in court. With that backing, the IRS moved to offer this settlement to help taxpayers make good.

The specifics of the settlements will vary by individual taxpayer. However, the IRS has said that the settlement would include concession of the income tax benefits that were claimed, as well as payment of appropriate fines and interest.

Right now, the IRS says it has offered settlements to those who have at least one open tax year under review, but it said it may expand the program to others.

Refusing the Settlement

The settlement offer is just that – an offer. Taxpayers do not have to accept it.

The IRS has warned that those who do not accept the settlement offer will continue in the audit process and may have to pay additional penalties, depending on what is found in the investigation.
Taxpayers will still have the right to appeal the results of their audit, but the IRS Independent Office of Appeals knows about the settlement offers, and the IRS is cautioning taxpayers that they are unlikely to get better results on appeal. Those who decline the settlement will also not be eligible for future settlement initiatives.

Getting Legal Help

A lot of money is on the line if you are being audited by the IRS. And if you are being audited on suspicion of impropriety surrounding a micro-captive insurance company, you could face even bigger penalties. You need an experienced tax professional in Mesa to help you through the process and to represent your interests.

The tax attorneys at Silver Law PLC may be able to help you. We represent clients undergoing audit, as well as those accused of civil or criminal tax impropriety. Our attorneys will look for ways to help you get the most out of your audit, and they can defend you on charges. All of our tax attorneys have worked for the IRS, and they can put that experience to work for you. We also represent clients involved in other tax litigation, those who are seeking innocent spouse relief, and those who need help with foreign tax reporting. Call us in Arizona to talk with a tax lawyer today!

Silver Law PLC

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