On April 11, 2025, the IRS issued Notice 2025-24, granting a limited window of relief from penalties for participants in, and material advisors who have assisted on, certain micro-captive insurance arrangements that have been classified as reportable transactions. Specifically, the IRS has indicated it will waive penalties under the Internal Revenue Code for those who file the requisite disclosure statements by July 31, 2025. This development follows the publication of final regulations earlier in the year, which had originally required disclosures by April 14, 2025 for participants and by April 30, 2025 for material advisors. Below is an overview of how the Notice changes the compliance landscape for micro-captive insurance transactions, why it matters, and what steps affected parties should consider taking. If you have engaged in a micro-captive insurance arrangement, you should consider contacting an experienced tax attorney.
Background: The Final Regulations and Fast-Approaching Deadlines
In January 2025, the Treasury Department and the IRS released final regulations identifying certain micro-captive insurance structures as either “listed transactions” or “transactions of interest.” Generally, a listed transaction is one the IRS has determined to be a tax-avoidance scheme, whereas a transaction of interest is one that has the potential for abuse but is not conclusively deemed abusive. Under the regulations, participants in either type of reportable micro-captive arrangement were required to file specific disclosure statements with the IRS. Material advisors, such as accountants, attorneys, or other professionals who aid in structuring or promoting these transactions, also had specific filing obligations under the same provisions.
The problem many businesses and advisors faced was the timing: the final regulations’ publication in early January meant disclosures would be due during tax season. Taxpayers had a mere 90 days after the issuance of the final regulations, until April 14, 2025, to file, and material advisors had until April 30, 2025. Because many micro-captive insurance arrangements go back multiple years, involved taxpayers and their advisors needed to review up to a decade of records to determine whether and how the final regulations applied. This scramble created substantial stress for small and mid-sized businesses, especially those already juggling annual filing deadlines in April.
The Industry’s Call for Relief
Recognizing the enormity of the task, several trade associations and advocacy groups representing micro-captive insurance companies sought additional time from the IRS. They argued that the 90-day period was insufficient to collect and organize the necessary documents, especially given how deeply embedded these arrangements can be in a small or mid-sized business’s finances. The letters to the IRS requested at least an additional 90 days to ensure accurate and thorough filings. They noted the risk of potential errors if taxpayers and advisors rushed to meet the rapidly approaching deadlines.
In the past, the IRS has demonstrated a willingness to extend certain deadlines due to natural disasters or other significant disruptions. However, an extension for regulatory compliance deadlines is less common, so the industry’s request for relief was an indicator of just how burdensome the new deadlines were for many businesses.
IRS Notice 2025-24: Limited Waiver of Penalties
In response to these concerns, Notice 2025-24 waives penalties under Code §§ 6707 (for material advisors) and 6707A (for participants) if the required disclosures are filed by July 31, 2025. The Notice specifically refers to these “Later Identified Micro-captive Listed Transactions” and “Later Identified Micro-captive Transactions of Interest” as transactions that became reportable on January 14, 2025. Rather than adjusting the original due dates, the IRS chose to keep them in place but grant a waiver from penalties for late filing—so long as the disclosures reach the IRS by the new July 31, 2025 deadline.
It is important to note that this waiver of penalties applies only to participants and advisors whose existing micro-captive arrangements became subject to reporting when the final regulations took effect. In other words, if you are filing a disclosure statement for a newly formed micro-captive transaction relevant to your 2024 tax return, the penalty waiver under Notice 2025-24 does not necessarily apply. In those circumstances, you might need to file on the original statutory due date, or else seek an extension of time to file your return.
Additionally, the IRS clarified that the waiver does not modify requirements under existing regulations which requires taxpayers to submit a copy of the disclosure statement when first attaching it to the tax return that reflects participation in a particular reportable transaction. As the Notice points out, taxpayers concerned about meeting the April 15, 2025 tax return deadline still have the option to request an extension for their return, thereby giving themselves more time to file the associated micro-captive disclosures.
Consequences of Missing the Extended Deadline
Failing to meet the original filing deadlines without taking advantage of the penalty waiver, by filing disclosures by July 31, 2025, exposes participants and advisors to substantial financial penalties. Section 6707A, for example, can impose large fines for non-disclosure or inaccurate disclosures of listed transactions. Meanwhile, Section 6707 imposes distinct penalties on material advisors who fail to meet their obligations. Such penalties can quickly accumulate and lead to further scrutiny from the IRS, including potential audits or other enforcement actions.
Moreover, if the IRS determines that an individual or business willfully failed to disclose a listed or reportable transaction, more serious sanctions could come into play, including criminal tax investigations by the Department of Justice. While it is not the goal of the IRS to criminally prosecute every taxpayer for administrative oversights, repeated or deliberate failures to comply with mandatory disclosure rules can escalate a taxpayer’s risk.
Seeking Professional Guidance
Even with this waiver of penalties, the rules surrounding micro-captive insurance transactions remain complex. Determining whether a particular arrangement qualifies as a listed transaction or a transaction of interest under the final regulations requires a detailed tax and legal analysis. Various factors, including premium amounts, risk distribution models, and the economic substance of the insurance policies can influence whether the transaction crosses the threshold into a reportable territory.
That is where the Tax Law Offices of David W. Klasing comes into play. Led by a dually licensed Tax Attorney-CPA, our practice offers an integrated approach that addresses both the legal and financial components of micro-captive insurance compliance. We can help you conduct a thorough review of your historical and ongoing micro-captive arrangements, determine if the final regulations designate your transaction as listed or a transaction of interest, evaluate whether you are an official “participant” required to file a disclosure, or if you qualify as a material advisor under Section 6111, and assist in meeting the new July 31, 2025 deadline to take advantage of the limited penalty waiver.
We understand that micro-captive insurance can be a valuable risk-management tool for small and mid-sized businesses when properly structured. However, the IRS’s focus on potential tax avoidance has put these transactions under a microscope. Ensuring timely and accurate filings can save you from both financial penalties and the stress of IRS inquiries down the road.
Moving Forward
Notice 2025-24 offers breathing room for anyone dealing with micro-captive disclosures. Rather than risking steep penalties for missing the original deadlines, participants and material advisors now have until July 31, 2025, to comply. The IRS has made it clear that this relief is meant to accommodate the realities of tax season and the burdensome nature of analyzing a decade’s worth of financial records.
Still, the extended deadline should not cause taxpayers or their advisors to become complacent. Ensuring a complete and accurate disclosure can be time-intensive, particularly for those operating multiple micro-captive entities or those who used complex structures. Waiting until the last minute could jeopardize your ability to file properly and put you at risk of scrutiny. It is unknown whether (and potentially unlikely) the IRS will postpone the application of penalties again.
At the Tax Law Offices of David W. Klasing, our team is here to help you understand these complicated regulations and protect your interests. If you have questions about IRS Notice 2025-24, micro-captive insurance transactions, or your filing obligations, we encourage you to reach out and discuss your situation.
