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IRS Hints at Increased Prosecution of Abusive Micro-Captive Insurance Tax Shelter Cases

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    In recent months, Forbes and Bloomberg Tax have published articles cautioning taxpayers of potential indicators that the IRS plans to refer tax shelter abusers to its Criminal Investigation division (IRS-CI), which aids the Tax Division of the U.S. Department of Justice (DOJ). This move would likely focus, at least in part, on micro-captive insurance tax shelters, transactions involving which were the subject of Notice 2016-66. The following year, the IRS announced an enforcement initiative targeting captive tax shelter abuse, while warning taxpayers about abusive micro-captive insurance tax shelters – and its efforts to prosecute those who utilized them. History now appears to be repeating itself, if recent statements by IRS officials are any indicator. Tax shelter participants should be on red alert: the time to consult a criminal tax defense attorney is now.

    Note:  It may be possible to avoid criminal tax prosecution through the use of a domestic or offshore voluntary disclosure, but it is imperative to reach out to the IRS BEFORE they reach out to you!!!

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    Micro-Captive Insurance Tax Shelters in IRS, DOJ Crosshairs Again

    At a November 2019 conference for the American Institute of CPAs (AICPA), the following statement was made by Eric Hylton, who became commissioner of the IRS’ Small Business and Self-Employed (SB/SE) division in July after serving as IRS-CI deputy chief: “Micro-captives is another area… we want to think about. Are there some fraud cases that we want to send over to CI, some quality fraud cases?”

    It seems likely that the answer is a resounding “yes.” Micro-captive transactions were described in Notice 2016-66 as having “a potential for tax avoidance or evasion,” and, perhaps unsurprisingly, make repeat appearances on the IRS’ annual lists of tax scams, known as the “Dirty Dozen” – most recently, in 2019. Forbes speculated that the IRS would most likely target a promoter, followed by “an actuary or an actuarial firm which facilitated the sale of abusive 831(b) captives,” a reference to 26 U.S. Code § 831(b). This section of federal tax code, which applies to captive insurers (“certain small insurance companies”), allows such entities to exclude specific amounts of yearly net insurance premiums, meaning that only investment income – not underwriting profits – are subject to federal income tax.

    This sort of tax strategy can be legitimate, within the bounds of the law. However, serious legal problems can arise when a promoter convinces taxpayers to “participate in schemes that lack many of the attributes of a typical insurance company.” For example, premiums are often excessive, while policies are frequently contradictory and difficult to interpret clearly. In short, what claim to be insurance companies are little more than vehicles for tax fraud.

    Scams of this nature have been on the IRS’ radar for the past several years, with recent indicators that a new crackdown may be on the horizon. If you believe that you may be affected, you are advised to discuss your situation with an experienced IRS fraud lawyer right away.


    IRS Tax Fraud Defense Attorneys Serving Northern + Southern California

    The IRS acknowledges that some taxpayers “use captive insurance companies that make elections under § 831(b) for risk management purposes that do not involve tax avoidance.” However, it also closely watches taxpayers who have participated, which may lead to a tax audit or even IRS criminal investigation. If you believe you are in jeopardy of civil or criminal tax penalties, need assistance with an IRS tax audit, received a settlement offer from the IRS, or simply have questions about tax compliance or tax planning and preparation, contact the Tax Law Office of David W. Klasing online to schedule a reduced-rate consultation. You can also reach us by calling our main office in Irvine at (800) 681-1295 for immediate assistance.







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    Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here.

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