In a News Release, IRS has said that it has stepped up its examinations of micro-captive insurance arrangements and has urged participants in abusive micro-captive insurance arrangements to exit those transactions as soon as possible.
Background. A micro-captive insurance transaction is a transaction in which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for premiums for insurance coverage. The related company that the parties treat as a captive insurance company elects under Code Sec. 831(b) to be taxed only on investment income and, therefore, excludes the payments directly or indirectly received under the contracts from its taxable income.
In Notice 2016-66, IRS concluded that certain micro-captive insurance transactions had the potential for tax avoidance and evasion and notified taxpayers that these transactions were “transactions of interest” that need to be disclosed to IRS.
Since the issuance of the Notice, IRS has issued several pronouncements about micro-captive insurance transactions. For example, in October 2020, the IRS issued IR 2020-241, which contained a time-limited settlement offer.
IRS News Release. IRS says that it has stepped up its examinations of micro-captive insurance arrangements.
IRS noted that, on March 10, 2021, the Tax Court held in Caylor Land & Dev., T.C. Memo. 2021-30, that a micro-captive arrangement failed to qualify as insurance for federal tax purposes. This decision follows several earlier Tax Court decisions that also confirmed IRS’s determinations that certain micro-captive arrangements were not eligible for the claimed federal tax benefits. In Caylor, the Tax Court also sustained IRS’s determination of accuracy-related penalties and rejected the taxpayer’s claim of reliance on tax advice.
IRS encourages taxpayers who engaged in abusive micro-captive transactions to consult an independent tax advisor prior to filing their 2020 tax returns. Taxpayers should consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions.
Source: Checkpoint Newsstand 4-13-21
