IRS sees success in pursuing micro-captive insurance schemes

The Internal Revenue Service has convinced nearly 80 percent of the taxpayers who received settlement offers after engaging in micro-captive insurance schemes to accept the settlement terms. But there are still thousands of other taxpayers who have participated in what the IRS considers to be “abusive” insurance transactions, and the agency is setting up 12 new examination teams to focus on examining them in the next few months.

Last September, the IRS began mailing out settlement offers to up to 200 taxpayers who have been under audit for participating in micro-captive insurance tax schemes, offering to settle with them, but only if they respond within a limited time (see IRS offers to settle with insurance tax scammers). The settlement offer came after three U.S. Tax Court decisions confirming that certain micro-captive arrangements aren’t eligible for federal tax benefits. The terms of the settlement offer required substantial concession of the income tax benefits claimed by the taxpayer along with appropriate penalties. With 80 percent of the taxpayers accepting the settlement terms, the IRS is claiming success.

“The overwhelming acceptance rate of the private settlement offer is a reflection of the success of the government’s work to stop this abuse,” said IRS Commissioner Chuck Rettig in a statement Friday. “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.”

Abusive micro-captives have been a concern to the IRS for the past few years. The transaction has appeared on the IRS Dirty Dozen list of tax scams since 2014. In 2016, the Treasury Department and the IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.

The IRS said Friday it would continue to pursue those involved in micro-captive and similar abusive transactions in the future, and would significantly increase its enforcement activity in this area. The IRS has created 12 new examination teams, using employees from its Large Business and International and Small Business/Self-Employed divisions, who will be targeting the transactions and initiating examinations of several thousand taxpayers in the months ahead. The teams will be able to use all the IRS’s enforcement tools, including summonses, to get the necessary information. The targets may be facing full disallowance of the claimed deductions, inclusion of income by the captive entity and imposition of all the applicable penalties.

Disclosure of participation in micro-captive insurance transactions is required with the IRS Office of Tax Shelter Analysis under Notice 2016-66, and failure to properly disclose the transactions can lead to significant civil penalties. The IRS is advising taxpayers who are involved in micro-captive transactions to immediately consult with competent tax advisors on the proper treatment for past and future tax years so they can consider the best options available to them.

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