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

Micro-captive Insurance Companies Beware

Currently, there is a tax provision that allows micro-captive insurance companies – created to provide insurance to small companies that create them – to earn premiums tax free.  Ultimately, this was intended to provide more affordable insurance coverage to policyholders.  When the insurance company is well diversified, these have not been an issue.

Unfortunately, some taxpayers have abused the system to benefit themselves without providing real or realistic insurance policies, or have provided minimal insurance for exorbitant prices.  These cases of concern around micro-captive insurance companies that are set up with fully deductible premiums and no tax payments, and with little to no ability for the IRS to review them, has provided reasons for policy change.  Therefore, under President Biden’s green book, there are several proposed provisions to make those arrangements much more costly for the captive insurance companies.  Here is a summary of the proposed guidelines and impacts:

• Proposal to establish an untaxed income account (UIA) regime. This applies to any captive insurance companies that receive 20% of more of their premiums from any one policyholder or a related group of policy holders.

• Impact to captive insurance companies: It allows the company not to pay tax on these premiums, and dividends or loans made to the insured parties would be treated as a deemed distribution from the UIA and taxed at a high rate.

• Impact to agribusinesses: Many captives will ensure that no related group of companies will pay more than 20% of total premium income (the threshold that would create a tax payment by the insurance company).  Should the company exceed this and pay taxes however, it will essentially reduce the benefit to farm operations that have created these captives – ultimately, reducing the ability for captives to survive, and leaving a high tax bill on the table for the previous net premiums earned.

“At this early stage, coupled with recent IRS activity, we’re watching to see what will take shape to stand before Congress. But we fully expect new tax requirements in some form to eliminate the ability of those captives abusing the tax-free provision for small insurance companies,” says Lance Wallach, an expert witness in captive insurance lawsuits whose side has never lost a case.

If you own or participate in a “micro-captive” insurance company, speak to your captive manager about their reinsurance and ceding percentages, and to your captive manager and captive tax return preparer to discuss potential implications of these proposals.

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

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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?

[email protected]

Captive Insurance Plans

Micro-Captive and the IRS

Captive Insurance Risk Alert, Micro-Captive and the IRSThe 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.

Lance Wallach does expert witness testimony and has never lost a case!

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Testimonials – Lance Wallach

Get the Help You Deserve, Lance WallachTestimonials – Lance Wallach

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Lance Wallach

Lance Wallach, Thank you very much for providing me with this information. I will review it next week and, I’m sure, be in touch. I very much appreciate your help. Testimonials – Lance Wallach

Amanda J. Andrews associate counsel, Legal Division Arkansas Insurance Department

His research and insights have proved right on the money!

Debra Rothberg

“Lance is extraordinarily intelligent. He has few peers, if any, in his area of expertise. I unhesitatingly recommend Lance.”

Gary Lesser, Owner, GSL Galactic Consulting

“Excellent results, Google him”

Larry Wilconsin

Lance is a true expert on VEBA Plans. Five years ago, he took the call of a total stranger, and in doing so, he spent an hour helping me solve my client’s problem. During the past five years Lance consistently is proven to be a valuable resource for me and my practice. He is a warm open person who is willing to invest in others success.

Don Atherton, CEBS, CFP, CLU, Owner, Integrated Benefits Solutions, Inc.

Lance is a wonderful resource, not just in regards to VEBAs, 412’s, abusive plans and IRS codes, but also who and what he knows about certain broker-dealers. I called him about recent changes to 412. He got on the subject of broker-dealers, and he lent me so much of his time to inform me about making the right choice. He is a really great, personable colleague to all in the financial world.

Robert Thomas, Resident Insurance Producer, Independent Consulting

Lance is an expert in little known tax reduction techniques for profitable business owners.

Matthew Tuttle, Owner, Tuttle Wealth Mgmt, LLC

“Lance is perhaps the country’s foremost expert at establishing various kinds of employee benefit programs for companies and individuals and also highly knowledgeable about the programs that do not meet the legal requirements of the Internal Revenue Service. He is a well known author, has spoken at numerous meetings attended by financial services practitioners and is the professional you want on your side when the IRS comes calling.” 

Bill Goodwill


irs audits captives

Captive Insurance Audit Settlements

Captive Insurance Audit SettlementsThe Internal Revenue Service announced that the mailing of a time-limited settlement offer for certain taxpayers under audit who participated in abusive micro-captive insurance transactions. Captive Insurance Audit

Taxpayers eligible for this offer will be notified by letter with the applicable terms. Taxpayers who do not receive such a letter are not eligible for this resolution.

Abusive micro-captives have been a concern to the IRS for several years. The transactions have appeared on the IRS “Dirty Dozen” list of tax scams since 2014. In 2016, the Department of Treasury and IRS issued Notice 2016-66 (PDF). Some  identified certain micro-captive transactions as having the potential for tax avoidance and evasion.

Following wins in three recent U.S. Tax Court cases, the IRS has decided to offer settlements to taxpayers currently under exam. In recent days, the IRS started sending notices to up to 200 taxpayers.

Captive Insurance Audit SettlementsTax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Under section 831(b) of the Internal Revenue Code, certain small insurance companies can choose to pay tax only on their investment income. In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance.

IRS has consistently disallowed the tax benefits claimed by taxpayers in abusive micro-captive structures. Although some taxpayers have challenged the IRS position in court, none have been successful. To the contrary, the Tax Court has now sustained the IRS’ disallowance of the claimed tax benefits in three different cases.

The IRS will continue to disallow the tax benefits claimed in these abusive transactions and will continue to defend its position in court. The IRS has decided, however, to offer to resolve certain of these cases on the terms outlined below.

“Now the IRS is taking this step in the interests of sound tax administration,” IRS Commissioner Chuck Rettig said. “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. We will continue to vigorously pursue these and other similar abusive transactions going forward.”

The settlement brings finality to taxpayers with respect to the micro-captive insurance issues. The settlement requires substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties (unless the taxpayer can demonstrate good faith, reasonable reliance). Taxpayers eligible for the settlement will be notified of the terms by letter from IRS.

Captive Insurance Audit SettlementsThe initiative is currently limited to taxpayers with at least one open year under exam. Taxpayers who also have unresolved years under the jurisdiction of the IRS Appeals may also be eligible, but those with pending docketed years under Counsel’s jurisdiction are not eligible. The IRS is continuing to assess whether the settlement offer should be expanded to others.

Taxpayers who receive letters under this settlement offer, but who opt not to participate, will continue to be audited by the IRS under its normal procedures. Potential outcomes may include full disallowance of captive insurance deductions, inclusion of income by the captive, and imposition of all applicable penalties.

Although taxpayers who decline to participate will have full Appeals rights, the IRS Independent Office of Appeals is aware of this resolution initiative. Given the current state of the law, it is the view of the IRS Independent Office of Appeals that these terms generally reflect the hazards of litigation faced by taxpayers, and taxpayers should not expect to receive better terms in Appeals than those offered under this initiative.

Taxpayers who are offered this private resolution and decline to participate will not be eligible for any potential future settlement initiatives. The IRS also plans to continue to open additional exams in this area as part of ongoing work to combat these abusive transactions. 

irs audits captives

abusive micro-captive transactions

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For the third consecutive year, the IRS places abusive micro-captive insurance tax shelters on its list of “Dirty Dozen” tax scams. IRS takes next step on abusive micro-captive transactions; nearly 80 percent accept settlement, 12 new audit teams established

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Abusive tax shelters, trusts and conservation easements

Abusive tax shelters, trusts and conservation easements
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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.