If you have participated in micro-captive insurance schemes, the following information may impact you directly. Earlier this month, the Internal Revenue Service posted an announcement stating the IRS would make “a time-limited settlement offer for certain taxpayers under audit who participated in abusive micro-captive insurance transactions,” subject to certain criteria. Approximately 200 taxpayers nationwide are eligible for inclusion in the settlement. If you are one of them, you will receive a written notice from the IRS, at which point you must make a critical decision: either participate in the settlement or decline and face continued auditing (along with potential for various penalties). If you have received or expect to receive this limited-time IRS settlement offer, you should weigh your legal options carefully with an experienced tax attorney, like the audit lawyers at the Tax Law Office of David W. Klasing. We can help you determine how to proceed if you are eligible for the settlement.
What Are Micro-Captive Insurance Companies, and How Has the IRS Targeted Them?
Our tax attorneys will begin by providing some background information regarding micro-captives and IRS enforcement. For information about the recent settlement announcement, simply skip ahead to the next section of this article.
A micro-captive is a type of member-owned insurance company regulated by federal law under 26 U.S. Code § 831(b), pertaining to “tax on insurance companies other than life insurance companies.” This section contains special provisions that enable eligible captives to avoid the taxation of underwriting profits. Instead, only investment income is subject to U.S. income tax.
This arrangement presents clear financial benefits – and in some cases, opportunities for abuse. Micro-captive insurance schemes and other abusive tax shelters have long remained an enforcement priority for the IRS, which consistently places them on its annual “IRS Dirty Dozen” lists (along with schemes involving return preparer fraud, falsely padded deductions, and the fraudulent claiming of tax credits). Indeed, the IRS called micro-captives an ongoing “concern” in its settlement announcement this September, noting that “transactions [of this nature] have appeared on the IRS ‘Dirty Dozen’ list of tax scams since 2014.” (Here, for instance, is the IRS’ 2018 writeup on this issue.)
The IRS has targeted captive tax shelter abuse with enforcement initiatives in the past, at least as recently as 2017. It is therefore unsurprising that the Service is now taking action to “bring… finality to taxpayers with respect to… micro-captive insurance issues,” which is the stated goal of the settlement.
Did You Make Abusive Micro-Captive Insurance Transactions? Consider Participating in the IRS Settlement Offer
On September 16, 2019, the IRS website posted an official news release (IR-2019-157), which is linked at the top of this article, making the following announcement: “IRS offers settlement for micro-captive insurance schemes; letters being mailed to groups under audit.” The contents of the announcement are summarized below for taxpayers who may be affected.
- Why is the IRS making this settlement offer now? IRS Commissioner Chuck Rettig, who was quoted in the release, provided the answer to this question: “The IRS is taking this step in the interests of sound tax administration. 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.”
- What “court cases” is he talking about? As noted in the announcement, the IRS has, in three separate civil cases, prevailed in U.S. Tax Court against taxpayers who unsuccessfully attempted through tax litigation to claim benefits obtained through participation in micro-captive scams.
- Who is included in the settlement offer? This settlement offer is extremely limited, with only about 200 taxpayers included. In fact, the true figure is likely smaller, since the IRS specified “up to 200 taxpayers” in its notice.
- How do I know if I am included? You do not need to contact the IRS or submit any forms to find out whether you are covered by the settlement offer. The IRS will contact you, if you are deemed to have potential eligibility. As the announcement explained, qualifying taxpayers “will be notified by letter with the applicable terms. Taxpayers who do not receive such a letter are not eligible for this resolution.” (However, the IRS did suggest that there is potential for the program to be expanded in the future.)
- What are the terms of the settlement offer? The IRS did not specify the precise terms of the settlement offer in its announcement, noting that, instead, eligible taxpayers would simply “be notified of the terms by letter from [the] IRS.” The announcement did, however, strongly imply that accepting the offer would be in many taxpayers’ best interests, closing out with this pointed warning, which is difficult to misinterpret: “Taxpayers should not expect to receive better terms in Appeals than those offered under this initiative.”
- What happens if I don’t participate in the settlement? As noted above, the IRS is strongly urging affected taxpayers to participate. If you choose to decline, you may appeal – but as the quote above suggests, the odds of success are likely limited. As the September announcement warned taxpayers, IRS Appeals “is aware of” the fact that eligible taxpayers already have the option to participate in the settlement offer. Moreover, taxpayers who decline participation “will continue to be audited by the IRS under its normal procedures,” potentially resulting in additional tax, interest, penalties, and other unwanted outcomes.
IRS Tax Audit + Appeals Attorneys in California
If you recently participated or think you may have participated in abusive micro-captive insurance transactions, the IRS settlement offer could provide a way forward with minimal damage. As Commissioner Rettig cautioned, “[The IRS] will continue to vigorously pursue these and other similar abusive transactions going forward.”
Discuss your legal options with an experienced IRS tax lawyer today. For a reduced-rate consultation regarding the settlement offer, contact the Tax Law Office of David W. Klasing online, or call our main office at (800) 681-1295 for assistance.
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