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831b Micro-Captives are currently on the IRS Dirty Dozen List
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Captive Insurance Risk Alert

Captive Insurance Risk AlertTax practitioners should be cognizant of the Internal Revenue Service (“IRS”) increasing and focused activity related to micro-captive insurance companies (hereinafter referred to as Captive Insurances. Captive Insurance Risk Alert

Additional scrutiny and skepticism may increase the professional liability risk of a CPA firm. CPA firms with clients who have established, or are considering establishing, a Captive should pay special attention to this Risk Alert.

IRS Audits Micro-Captives

IRS Audits Micro-Captives IRS Audits Micro-CaptivesShortly after the Internal Revenue Service once again warned taxpayers to steer clear of unscrupulous promoters selling abusive micro-captives. It is part of the IRS annual Dirty Dozen listing. The IRS Large Business and International (LB&I) Division touted the success of its partnership with the Small Business/Self-Employed Division in carrying out the micro-captive campaign.

The US Tax Court handed the IRS its third straight victory involving a small captive structure in Syzygy v. Commissioner. Six days after the Syzygy opinion was issued, LB&I announced the initiation of a “Captive Services Provider Campaign” aimed at ensuring US multinational companies pay their captives no more than arm’s-length prices.2 The IRS is clearly moving quickly to address tax compliance issues in the captive world.

The IRS has now obtained victories in cases involving both forms of small captives electing tax-exempt status under § 501(c)(15) and captives electing to be taxed only on investment income under § 831(b). With each victory in court, the IRS has succeeded in highlighting problematic program design features and implementation missteps. Going forward, IRS revenue agents and appeals officers will likely look to the deficiencies identified in the case law in resolving captive controversies.

Lance Wallach receives hundreds of calls annually to help people fight the IRS and get their money back from the promoters of these scams. As an expert witness, Lance’s side has never lost a lawsuit. Google Lance Wallach and your advisor, who do you trust?

+1 516-236-8440

Wallachinc@gmail.com

Micro Captive Insurance audit deal from IRS

Micro-captive Insurance Schemes

Micro-captive insurance schemesIRS expands enforcement focus on abusive micro-captive insurance schemes.

WASHINGTON — With the October 15 filing deadline quickly approaching, the Internal Revenue Service today encouraged taxpayers to consult an independent tax advisor if they participated in a micro-captive insurance transaction.

The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS or Chief Counsel on terms more favorable than previously announced. Any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer.

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IRS to Settle with some under audit for micro-captive insurance plans

IRS Gathers Information on Taxpayers

IRS Gathers Information on Taxpayers, Micro-captive, IRS Dirty Dozen listSince the time when micro-captive insurance companies were placed on the IRS Dirty Dozen list of tax scams, it has also been identified as a transaction of interest.

The IRS continues to expand its enforcement efforts of what it views as abusive micro-captive insurance arrangements.

The IRS gathers information on taxpayers and institutes a new virtual currency compliance program.

Excerpt from one of their notices; We have information that you have or had at least one account containing virtual currency. Yet may not have properly reported your transactions involving virtual currency, which may include cryptocurrency and/or non-crypto virtual currencies.

A new IRS Notice 6174-A which states that the IRS clearly sees noncompliance on virtual currency transactions as a threat to the tax system.

As if the onslaught of recent losses in Tax Court was not enough, investors in syndicated conservation easements now have more to worry about.

The Senate Finance Committee released a bipartisan report condemning syndicated conservation easements as abusive and therefore encouraging the IRS to take further action to ferret out such abuse.

Lance Wallach has received hundreds of calls in order to help citizens fight the IRS on this subject and help sue the promotors of easement, captive, and cryptocurrency plans.

Your advisor! Who do you trust?

wallachinc@gmail.com

CIC Services LLC v. IRS

micro-captive transactions, CIC Services LLC v. IRS, micro-captive transactions

A lawsuit arguing that taxpayers are permitted to challenge a Treasury Department reporting requirement without first violating it defies a measure Congress took to protect tax collection, the U.S. Solicitor General’s Office told the U.S. Supreme Court.

The office made that argument in a Wednesday court filing urging the justices against taking up a case testing the reach of the Anti-Injunction Act. The act blocks lawsuits aimed at restraining officials from assessing or collecting taxes, which some interpret as shielding the department from early legal challenges to regulatory actions.

In the new filing, the government insisted that the reporting requirement is directly tied to tax collection.

“Requiring taxpayers and tax professionals to report information (and tax professionals to keep records) about such transactions enables the IRS to ensure that taxes applicable to them are not evaded but are properly assessed and collected”, the Solicitor General’s Office said.

CIC Services LLC, a Tennessee-based company, has argued that the law doesn’t block its challenge to a reporting requirement backed by a penalty in IRS Notice 2016-66 because it’s challenging the burdens of reporting rather than the penalty itself and, in any event, the penalty isn’t a tax.

The case strongly divided judges at the U.S. Court of Appeals for the Sixth Circuit, with a three-judge panel ruling 2-1 in favor of the government and multiple judges weighing in separately when the full circuit declined to rehear that decision.

The IRS notice required CIC Services to report the micro-captive transactions it advised on, which involve small insurance companies that are allowed to pay tax on just their investment income if their premium income doesn’t surpass $2.3 million. The IRS has argued that the arrangements may be tax-avoidance vehicles rather than genuine insurance.

CIC Services has said the notice containing the reporting requirement isn’t legally valid because the IRS didn’t notify the public of its plans for the requirement and respond to comments in advance, which the company says was required by the Administrative Procedure Act.

An attorney for CIC Services LLC didn’t immediately return a request for comment.

The case is CIC Services, LLC v. Internal Revenue Service, U.S., No. 19-930, response brief filed 3/25/20

Update to Previous IRS Announcements

Update to Previous IRS Announcements

Update to Previous IRS Announcements, micro-captive insuranceOn April 22, 2020, in a statement made by email to a tax reporter, the IRS announced an extension of the due date to respond to its letters of inquiry to certain micro-captive insurance participants. The original May 4, 2020, due date set forth in IRS Letter 6336 has been automatically extended to June 4, 2020, due to the ongoing COVID-19 pandemic.

The IRS statement urges business owners to call the IRS hotline phone number contained in the letter if they need time beyond June 4 to provide a written response. The IRS previously announced the mailing of time-limited settlement offers for certain taxpayers under audit who have engaged in micro-captive insurance transactions.

Update to Previous IRS Announcements

On March 20, the IRS sent Letter 6336 to certain micro-captive taxpayers requiring such taxpayers to advise the IRS if they are no longer claiming deductions or other tax benefits for covered micro-captive insurance transactions. If the taxpayer is no longer claiming deductions or other tax benefits from a micro-captive insurance company, the IRS has instructed the taxpayer to provide it with written notification that includes:

A signed penalty of perjury statement is a statement identifying the last tax year in which the taxpayer claimed deductions or other tax benefits from micro-captive insurance premiums; and if applicable, the date the taxpayer ceased participating in the micro-captive insurance transaction.
Letter 6336 also encourages taxpayers to consult an independent tax adviser before filing 2019 income tax returns and to consider amending past returns to remove improperly claimed deductions or other tax benefits.

If taxpayers are still claiming deductions or other tax benefits from micro-captive insurance transactions, they must continue disclosing such participation by filing Form 8886, the Reportable Transaction Disclosure statement, with their income tax returns.

Letter 6336, which originally set a May 4, 2020, deadline to provide a written response, the letter warns that if the recipient of a Letter 6336 fails to respond by the due date, the IRS may refer the taxpayer for examination. Examinations may result in a full disallowance of claimed micro-captive insurance benefits and imposition of applicable penalties and interest.

These letters follow IR-2020-26, which on Jan. 31, 2020, announced new IRS enforcement activity in this area. In that announcement the IRS reported that nearly 80% of taxpayers who previously received offer letters had elected to accept the settlement terms. In addition, the IRS established 12 new examination teams to open audits related to thousands of taxpayers impacting micro-captive insurance transactions.

U.S. Department Of Justice Files Suit

IRS Settles micro-captive insurance audits

micro-captive insurance audits

Anyone who has received an IRS offer to settle a micro-captive insurance audit should immediately consult an experienced tax lawyer to understand the pros and cons of the offer before any deadline expires. micro-captive insurance

IRS to Settle with some under audit for micro-captive insurance plans

 audits The IRS announced its plan to mail settlement offers to a maximum of 200 taxpayers under audit for their participation in micro-captive insurance arrangements which the IRS considers “abusive” and in violation of tax laws. Only those who receive settlement offer letters are eligible for the current initiative. The IRS says that the offer could be offered to others later.

The agency will continue to audit those that reject the offers, subject to tax assessment and available penalties. These taxpayers will not be included in “future settlement initiatives.”

The IRS elected to make the current offers after it was successful in three cases in U.S. Tax Court plans to continue to “vigorously pursue” suspicious micro-captive transactions, which have been on the “Dirty Dozen” list of tax scams since 2014.

What is a micro-captive insurance arrangement?

A business may establish a small micro-captive insurer (or reinsurer) designed to cover certain risks and losses the business may suffer. The insured business normally can deduct insurance premiums as a business expense. Under certain circumstances, the eligible captive insurer can elect to only pay taxes on income from investments and not on income from premium collection.

The structure of these arrangements is subject to abuse of tax benefits when the small insurer is treated as a micro-captive but does not really function as an insurance company. In other words, tax avoidance can happen when the insured business gets deductions for premiums and the captive insurer pays taxes only on investments, but the insurer is more like a sham entity not functioning as a real insurance company would.

In addition, the arrangements may come under IRS scrutiny when the business that pays insurance premiums to the micro-captive insurer turns around and takes loans or other financial benefits from the captive entity. Another red flag can be premiums that are much higher than the market dictates. Sometimes the IRS looks more closely when a third party like an accountant or financial planner makes the arrangements.

Another area of potential IRS interest is when the involved parties fail to report certain related transactions as required by law. Failure to accurately report can bring large financial penalties.

Proceed with caution

The use of micro-captive insurance arrangements is common with many large companies using at least one currently and participation increasing among smaller businesses, reports the Insurance Journal.

According to the IRS, there are about 500 cases in the court system dealing with micro-captive insurance issues. Anyone with this kind of arrangement or considering one should get advice from an attorney to be sure that it is compliant with tax law and for advice about how to report transactions and handle related income tax issues.

Anyone already embroiled in an audit or dispute with the IRS over a captive insurer issue should also seek experienced legal advice. A tax lawyer may be able to negotiate an acceptable arrangement with the agency or have other proposed legal resolutions.

irs audit captive

IRS is cracking down on micro-captives

IRS is cracking down on micro-captivesAccording to the IRS, nearly 80% of taxpayers who received a time-limited settlement offer elected to accept the settlement terms. The IRS is establishing 12 new examination teams that are expected to open audits to thousands of taxpayers. IRS is cracking down on micro-captives.

The IRS has viewed abusive micro-captives as a threat to tax administration for several years. The transaction has appeared on the IRS “Dirty Dozen” list of tax scams since 2014. In 2016, the Department of the Treasury and IRS issued Notice 2016-66 that identified certain micro-captive transactions as having the potential for tax avoidance and evasion.

The settlement offer followed three U.S. Tax Court decisions holding that certain micro-captive arrangements are not eligible for federal tax benefits. The terms of the settlement required substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties.

The IRS is establishing 12 new examination teams that will be working to address abusive transactions and open additional exams. Examinations impacting micro-captive insurance transactions of several thousand taxpayers will be opened by these teams in the coming months. Civil outcomes may include disallowance of claimed captive insurance deductions captive entity and imposition of applicable penalties.

The IRS reminds taxpayers and advisors that disclosure of participation in micro-captive insurance transactions is required with the IRS Office of Tax Shelter Analysis under Notice 2016-66. Failure to properly disclose can result in civil penalties

Written by: Lance Wallach, CLU, CHFC, CIMC, National Society of Accountants Speaker of the year and member of the AICPA faculty of teaching professionals.

william coulson

Micro-Captive Audits

Micro-Captive Audits

Key Issues for Micro-Captive  Audits

Micro-Captive Audits

Micro-Captive Audits Shortly after the Internal Revenue Service again warned taxpayers to steer clear of unscrupulous promoters who sell abusive micro-captive insurance which is on the IRS Dirty Dozen list.  It is also targeted by the IRS Large Business and International Division touted the success of its partnership with the Small Business/Self-Employed Division in carrying out the micro-captive campaign, the US Tax Court handed the IRS its third straight victory involving a small captive structure in Syzygy v. Commissioner.

1 Six days after the Syzygy opinion was issued, LB&I announced the initiation of a “Captive Services Provider Campaign” aimed at ensuring US multinational companies pay their captives no more than arm’s-length prices.

2 The IRS is clearly moving quickly to address tax compliance issues in the captive world.

The IRS has now obtained victories in cases involving both forms of small captives under the Internal Revenue Code: captives electing tax-exempt status under § 501(c)(15) and captives electing to be taxed only on investment income under § 831(b). With each victory in court, the IRS has succeeded in highlighting problematic program design features and implementation missteps. Going forward, IRS revenue agents and appeals officers will likely look to the deficiencies identified in the case law in resolving captive controversies.

Program Review

Understanding the current state of the law regarding captives in the US Tax Court is important not only for pending IRS controversies but also for current micro-captive owners as they consider what approach to take going forward. While each case stands on its own, a thorough review of the captive program can help establish an informed basis for decision-making both before and during an audit.

To carry out this review, it is important to understand the key issues that will be addressed during a captive audit. Some of the core substantive issues, involving risk distribution and whether a captive program reflects insurance in the commonly accepted sense, are discussed below.

Super Factor: Arm’s-Length Transaction. One of the most important questions in determining whether a captive can survive IRS scrutiny is a simple one: Do the coverages make economic sense? Whether the coverages are “arm’s-length transactions” is important in determining whether there is real risk distribution, as well as whether the arrangement constitutes “insurance in its commonly accepted sense”.

Key Issues for Micro-Captive  AuditsWhile to date no court has addressed whether this factor might also play a role in resolving whether the arrangement should be set aside under judicial anti-avoidance doctrines, it is certainly possible that the courts could rely on the lack of arm’s-length arrangements as a predicate for applying “substance over form” or the economic substance doctrine.4

Regarding risk distribution, all three of the Tax Court micro-captive cases referenced above involved the employment of a risk pool established by the captive manager in order to enable the captive to insure third-party risk and obtain the requisite risk distribution.

In each case, after analyzing the risk pool as part of its risk distribution analysis, the court held that the participation in the risk pool did not result in adequate risk distribution for the captive. If a taxpayer relies on a risk pool, the IRS will request documentation supporting the risk pool structure.

This will include documentation setting forth the rights and responsibilities of the taxpayer vis-à-vis the others who similarly rely on the pool. Given the responsibilities of the pool participants, the IRS will look for evidence of security mechanisms that would traditionally be required. On top of the blueprint for the pooling mechanism, the IRS will want to review how it worked in reality and how it benefited the insured given the insured’s finances and history.

The courts thus far have reviewed captive policies from an objective viewpoint, considering policy metrics (e.g., total cost of risk and rates on line) before and after the implementation of the captive arrangement. After reviewing the various metrics, a court may consider subjective evidence to determine whether there was a rational justification for any expenditures to cover previously unprotected risks through a review of correspondence, marketing materials, etc.

For example, in Syzygy, the court noted that, generally, it is fair to assume a purchaser of insurance would want the most coverage for the lowest premiums.

After finding that the coverage and associated premium did not make economic sense, the Syzygy court also considered statements made by the taxpayer (which seemed focused on obtaining large tax deductions rather than putting in place a helpful insurance product), which confirmed the court’s conclusion that there was no true distribution of risk.5

Insurance in the Commonly Accepted Sense

Key Issues for Micro-Captive  AuditsIn determining whether program transactions constituted “insurance in the commonly accepted sense,” the courts also looked to whether the captive arrangements constituted arm’s-length transactions. The courts focused on whether the premiums were objectively reasonable. It is probably not much of a stretch for one to conclude that if the captive policies do not make sense, the IRS will conclude that the associated captive premiums were likewise unreasonable and thus, not insurance in the commonly accepted sense.

Likewise, if the insured fails to pursue a claim for which the policy appears to provide coverage, the IRS and the courts may view the arrangement as something other than insurance.

The Syzygy court reached the conclusion that the premiums were unreasonable with only two sentences’ worth of analysis.6 Despite the existence of a claim on the policy by the insured to the captive, adequate capitalization of the captive, and active regulatory oversight, these insurance-like traits were not enough to overcome alleged late-issued policies with ambiguous language and the lack of an arm’s-length transaction.

Thus, as the arm’s-length nature of the arrangement has been considered by the courts when questioning whether the arrangement involved risk distribution as well as whether a captive provided “insurance in the commonly accepted sense,” it is incumbent on the tax advisor to drill deeply into the facts that would bear on whether the arrangement made economic sense.

Opinion Letters

In an effort to avoid penalties, the taxpayer may produce an opinion letter regarding the deductibility of premiums paid into a captive program. Here, the advisor should review the terms of the opinion as well as all other communications, including marketing materials, that might impact the usefulness of the opinion.8 Further, the advisor must be cognizant of the fact that a written tax opinion will not protect a taxpayer from the accuracy penalty imposed with respect to a transaction lacking economic substance, even if the taxpayer relied on that opinion in good faith.9

The captive audit may start as a result of audit of another issue and then blossom into a captive audit or may be initiated solely due to the captive deduction itself. Over the last 2 years, after the § 831(b) micro-captive transaction was designated as a “transaction of interest,” the IRS has obtained a wealth of information from captive owners and captive managers, both from required filings regarding reportable transactions (Forms 8886, Reportable Transaction Disclosure Statement, and 8918, Material Advisor Disclosure Statement) and section 6112 list maintenance request to captive managers.

Information Document Requests

A captive audit will often involve intense questioning via Information Document Requests10 issued to both the captive and the insureds.11 In some cases, the insured taxpayer may handle responding on behalf of the captive as well as the insured party; in other cases, the captive manager or a third party may respond on behalf of the captive. It is critical to understand potential ethical issues, as well as the degree of control the taxpayer has over the captive for purposes of consistency in providing the IRS the information it is entitled to receive under the Internal Revenue Code.

If the requested information is not provided, not only will this likely result in summons enforcement proceedings (assuming the taxpayer can actually provide the information12), but the taxpayer should also be cognizant that any information not provided (perhaps for strategic reasons) may ultimately have to be produced in subsequent litigation challenging the IRS assessment. If critical or important documents are withheld and only surface later in litigation, then the taxpayer’s good faith may be put in question.

Ancillary Proceedings

Key Issues for Micro-Captive  AuditsSimultaneous with a tax audit, the advisor must be aware of and address numerous ancillary proceedings, such as issues related to state taxing authorities, civil proceedings involving service providers in particularly weak programs, as well as the exit of a small captive program.13

For example, the taxpayer may be interested in civil remedies, joining a class action, or seeking relief in arbitration.14 Consequently, the advisor will need to carefully review and monitor the flow of information, as it is being requested in different settings, utilized for different purposes, but ultimately for the benefit of the taxpayer client.

As an example, a failure to review and monitor communications may lead to tax counsel making statements to the IRS in a tax audit that are wildly inconsistent with statements made by plaintiff’s counsel in pursuing a claim against a service provider. In sum, a captive tax audit may become an incredibly complex process that involves managing numerous moving parts.

captive insurance audits

Captive Insurance and the IRS

The IRS continues to heavily scrutinize captive insurance arrangements. Certain captive insurance types have consistently appeared on the IRS Dirty Dozen list.

Micro-captives in particular have been identified as potential vehicles for illegal tax shelters and the IRS is more than happy to crack down on them.

If the IRS believes that a captive insurance company is claiming deductions for non-insurance activities they will litigate immediately.

This include companies which are claiming unreasonable premium deductions.

If the Captive company can’t prove that they are distributing risk, shifting risk, or whether transactions involve insurance risk then that captive is an IRS target.


wallachinc@gmail.com

IRS audits micro-captives

IRS Audits Captive Insurance Again

IRS Audits Captive Insurance AgainCaptive Insurance, Shortly after the Internal Revenue Service (IRS) again warned taxpayers to “steer clear” of unscrupulous promoters selling abusive micro-captives as part of its annual “Dirty Dozen” listing and the IRS Large Business and International (LB&I) Division touted the success of its partnership with the Small Business/Self-Employed Division in carrying out the micro-captive “campaign,” the US Tax Court handed the IRS its third straight victory involving a small captive structure in Syzygy v. Commissioner.

Six days after the Syzygy opinion was issued, LB&I announced the initiation of a “Captive Services Provider Campaign” aimed at ensuring US multinational companies pay their captives no more than arm’s-length prices. The IRS is clearly moving quickly to address tax compliance issues in the captive world.

The IRS has now obtained victories in cases involving both forms of small captives under the Internal Revenue Code: captives electing tax-exempt status under § 501(c)(15) and captives electing to be taxed only on investment income under § 831(b). With each victory in court, the IRS has succeeded in highlighting problematic program design features and implementation missteps. Going forward, IRS revenue agents and appeals officers will likely look to the deficiencies identified in the case law in resolving captive controversies.

Program Review

Understanding the current state of the law regarding captives in the US Tax Court is important not only for pending IRS controversies but also for current micro-captive owners as they consider what approach to take going forward. While each case stands on its own, a thorough review of the captive program can help establish an informed basis for decision-making both before and during an audit.

To carry out this review, it is important to understand the key issues that will be addressed during a captive audit. Some of the core substantive issues, involving risk distribution and whether a captive program reflects insurance in the commonly accepted sense, are discussed below.

Super Factor: Arm’s-Length Transaction. One of the most important questions in determining whether a captive can survive IRS scrutiny is a simple one: Do the coverages make economic sense? Whether the coverages are “arm’s-length transactions” is important in determining whether there is real risk distribution, as well as whether the arrangement constitutes “insurance in its commonly accepted sense”.

While to date no court has addressed whether this factor might also play a role in resolving whether the arrangement should be set aside under judicial anti-avoidance doctrines, it is certainly possible that the courts could rely on the lack of arm’s-length arrangements as a predicate for applying “substance over form” or the economic substance doctrine.

Risk Distribution

Regarding risk distribution, all three of the Tax Court micro-captive cases referenced above involved the employment of a risk pool established by the captive manager to enable the captive to insure third-party risk and (hopefully) obtain the requisite risk distribution. In each case, after analyzing the risk pool as part of its risk distribution analysis, the court held that the participation in the risk pool did not result in adequate risk distribution for the captive.

If a taxpayer relies on a risk pool, the IRS will request documentation supporting the risk pool structure. This will include documentation setting forth the rights and responsibilities of the taxpayer vis-à-vis the others who similarly rely on the pool. Given the responsibilities of the pool participants, the IRS will look for evidence of security mechanisms that would traditionally be required.

On top of the blueprint for the pooling mechanism, the IRS will want to review how it worked in reality and how it benefited the insured given the insured’s finances and history.

The courts thus far have reviewed captive policies from an objective viewpoint, considering policy metrics (e.g., total cost of risk and rates on line) before and after the implementation of the captive arrangement. After reviewing the various metrics, a court may consider subjective evidence to determine whether there was a rational justification for any expenditures to cover previously unprotected risks through a review of correspondence, marketing materials, etc.

For example, in Syzygy, the court noted that, generally, it is fair to assume a purchaser of insurance would want the most coverage for the lowest premiums. After finding that the coverage and associated premium did not make economic sense, the Syzygy court also considered statements made by the taxpayer (which seemed focused on obtaining large tax deductions rather than putting in place a helpful insurance product), which confirmed the court’s conclusion that there was no true distribution of risk.

Insurance in the Commonly Accepted Sense. In determining whether program transactions constituted “insurance in the commonly accepted sense”, the courts also looked to whether the captive arrangements constituted arm’s-length transactions.

Here, the courts focused on whether the premiums were objectively reasonable. It is probably not much of a stretch for one to conclude that if the captive policies do not make sense (e.g., are duplicative of commercial policies maintained by the taxpayer or that contain coverage that is arguably illusory), the IRS will conclude that the associated captive premiums were likewise unreasonable and thus, not insurance in the commonly accepted sense.

Likewise, if the insured fails to pursue a claim for which the policy appears to provide coverage, the IRS and the courts may view the arrangement as something other than insurance. The Syzygy court reached the conclusion that the premiums were unreasonable with only two sentences’ worth of analysis.6 Despite the existence of a claim on the policy by the insured to the captive, adequate capitalization of the captive, and active regulatory oversight, these insurance-like traits were not enough to overcome alleged late-issued policies with ambiguous language and the lack of an arm’s-length transaction.

Thus, as the arm’s-length nature of the arrangement has been considered by the courts when questioning whether the arrangement involved risk distribution as well as whether a captive provided “insurance in the commonly accepted sense,” it is incumbent on the tax advisor to drill deeply into the facts that would bear on whether the arrangement made economic sense.

Opinion Letters

In an effort to avoid penalties, the taxpayer may produce an opinion letter regarding the deductibility of premiums paid into a captive program. Here, the advisor should review the terms of the opinion as well as all other communications, including marketing materials, that might impact the usefulness of the opinion.

Further, the advisor must be cognizant of the fact that a written tax opinion will not protect a taxpayer from the accuracy penalty imposed with respect to a transaction lacking economic substance, even if the taxpayer relied on that opinion in good faith

Federal Tax Audit

The captive audit may start as a result of audit of another issue and then blossom into a captive audit or may be initiated solely due to the captive deduction itself. Over the last 2 years, after the § 831(b) micro-captive transaction was designated as a “transaction of interest,” the IRS has obtained a wealth of information from captive owners and captive managers, both from required filings regarding reportable transactions (Forms 8886, Reportable Transaction Disclosure Statement, and 8918, Material Advisor Disclosure Statement) and section 6112 list maintenance request to captive managers.

Information Document Requests

A captive audit will often involve intense questioning via Information Document Requests issued to both the captive and the insureds. In some cases, the insured taxpayer may handle responding on behalf of the captive as well as the insured party; in other cases, the captive manager or a third party may respond on behalf of the captive.

Here, it is critical to understand potential ethical issues, as well as the degree of control the taxpayer has over the captive for purposes of consistency in providing the IRS the information it is entitled to receive under the Internal Revenue Code.

If the requested information is not provided, not only will this likely result in summons enforcement proceedings (assuming the taxpayer can actually provide the information), but the taxpayer should also be cognizant that any information not provided (perhaps for strategic reasons) may ultimately have to be produced in subsequent litigation challenging the IRS assessment.

If critical or important documents are withheld and only surface later in litigation, then the taxpayer’s good faith may be put in question.

Ancillary Proceedings

Simultaneous with a tax audit, the advisor must be aware of and address numerous ancillary proceedings, such as issues related to state taxing authorities, civil proceedings involving service providers in particularly weak programs, as well as the exit of a small captive program.

For example, the taxpayer may be interested in civil remedies, joining a class action, or seeking relief in arbitration. Consequently, the advisor will need to carefully review and monitor the flow of information, as it is being requested in different settings, utilized for different purposes, but ultimately for the benefit of the taxpayer client.

As an example, a failure to review and monitor communications may lead to tax counsel making statements to the IRS in a tax audit that are wildly inconsistent with statements made by plaintiff’s counsel in pursuing a claim against a service provider. In sum, a captive tax audit may become an incredibly complex process that involves managing numerous moving parts.

captive

Abusive tax shelters, trusts and conservation easements

Abusive tax shelters, trusts and conservation easements
Read More

The IRS today warned taxpayers to steer clear of abusive tax avoidance schemes and the unscrupulous individuals who promote them. Abusive tax shelters

Abusive tax shelters, trusts and conservation easements make IRS’ “Dirty Dozen” list of tax scams to avoid.

help with irs audits

IRS Audits Focus on Captive Insurance Plans

IRS Attacks Business Owners that participate in a 419 plan, 412i plan, Section 79 or a Captive Insurance. Under Section 6707A  

lance wallach, IRS Audits Focus on Captive Insurance Plans

By Lance Wallach

Taxpayers who previously adopted any of the following plans, 419, 412i, captive insurance or Section 79 are in trouble.

In recent years, the IRS has identified many of these plans as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions.