IRS Cracks Down on Abusive Micro-Captive Transactions

For a long time, the IRS has been fighting the abuse of micro-captive transactions, which are designed to minimize a company’s tax obligation. The practice involves a complex series of transactions between a business or individual and a company that is treated as a captive insurance company. The company and many of its associates claim deductions for the premiums that they claim to be paying that insurance company, and that insurance company pays taxes only on investment income. The payments it receives for insurance premiums are excluded as taxable income.

Often, companies set up their own micro-captive insurance companies as a means to funnel money and to reduce their tax obligation. The IRS has increased its enforcement efforts to try to bring companies that use this scheme into compliance for their tax obligations.

In the fall, the IRS offered settlements to many companies identified as participating in micro-captive insurance schemes. The agency recently announced that the majority of companies that received these offers chose to accept them. Nearly 80 percent of taxpayers who received the offer accepted the settlement terms.

“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,” said IRS Commissioner Chuck Rettig. “Putting an end to abusive schemes is a high priority for the IRS.”

The IRS said that it intends to expand its efforts to bring taxpayers into compliance by creating 12 more examination teams to open audits for thousands more taxpayers in the coming months.

The agency has put the abuse of micro-captive insurance companies on its list of “Dirty Dozen” tax scams for the past six years. Four years ago, the agency identified these transactions as having the potential for tax avoidance and evasion in a special notice that it issued, Notice 2016-66.

Not all micro-captive insurance arrangements violate tax law. Only some of these arrangements are not eligible for federal tax benefits, but some companies take advantage of this possibility and claim to be eligible when they are not. The IRS looks closely at the transactions to determine if they are legal, and in audit, it requires evidence of eligibility. Those who were found to violate the law were slapped with substantial penalties.

The IRS warned that it will continue to vigorously pursue those involved in these schemes, as well as other schemes designed to avoid tax obligations. The new investigative teams will be formed with employees from the IRS Large Business and International and Small Business/Self-Employed divisions, and they will have all enforcement tools at their disposal, including summonses.

Should these teams find evidence of abuse in their investigations, they have the ability to issue judgements that include disallowing the full claimed deductions, including income from the captive entity in taxable income, and issuing steep penalties.

Consulting with a Tax Attorney

If you are involved in a micro-captive insurance arrangement, the IRS warns that you should consult with a tax attorney in Chandler to determine whether your actions are within the law. Your attorney can look at current and previous tax returns to determine if you made legally sound deductions or if you were in violation of the law. Your attorney can represent you at audit, if needed, or can represent you in tax litigation to try to minimize or remove your penalties – which can be significant. Depending on the circumstances surrounding your micro-captive insurance arrangement, you could even face criminal penalties. The risks are too great to try to work with the IRS on your own. You need an experienced tax attorney on your side.

Silver Law PLC can help. Our Chandler tax attorneys are dedicated to helping businesses like yours understand and meet their tax obligations so they can avoid penalty. Our attorney will work to help you minimize your tax obligation while still staying within the parameters of the law. If you have been notified that you are under suspicion for an abusive micro-captive transaction, our attorneys can help you present the right evidence to show that you were not involved in such a scheme, or they can negotiate on your behalf to get the right settlement. Call us in Arizona today to talk with a dedicated tax attorney who’s ready to help you.

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