The IRS correspondence received by taxpayers has caused confusion as to how to respond and whether a taxpayer’s micro-captive insurance arrangement will be respected.
Taxpayers still engaged in a micro-captive insurance arrangement should consider whether and how to respond to the IRS.
Based on concerns raised in IRS Notice 2016-66, questions to determine if the captive insurance arrangement is acceptable may include the following:
- Does the micro-captive insurance coverage match a business need or risk to the insured?
- Does the coverage duplicate other insurance coverage already in place?
- Are premium payments calculated to cover risk based on an analysis consistent with industry standards?
- Are premium payments consistent with premiums required under commercially available insurance contracts?
- Is there documentation of insurance coverage?
- Has the captive insurance company registered as an insurance company with the applicable government agency?
- If the captive insurance company is an offshore entity, has it elected under section 953(d) to be taxed as a U.S. insurance company?
- Does the captive insurance company have procedures for the handling of claims?
- Does the captive insurance company have adequate reserves to cover claims?
- Does the captive insurance company have assets that significantly exceed the necessary reserves?
- Does the captive insurance company invest in illiquid or speculative assets?
- Does the captive insurance company provide loans to related parties?
Although no one factor is dispositive of a bona fide captive insurance arrangement, these questions should be considered by taxpayers to gain an understanding of the micro-captive insurance arrangement and to evaluate their own arrangements. In addition, there is a real concern that the IRS may begin examining taxpayers who are still engaged in micro-captive insurance transactions. Taxpayers should contact Lance Wallach at 516-938-5007 for any questions or concerns regarding their Captive Investments.
Lance Wallach, CLU, CHFC, CIMC, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals is a frequent speaker on abusive tax shelters, Captive Insurance and Conservation Easements. He speaks at more than ten conventions annually and writes for over fifty publications.