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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.

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

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

Captive Insurance Risk Alert, Micro-Captive and the IRS

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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Micro Captive Insurance audit deal from IRS

Micro Captive Insurance audit deal from IRSThe IRS is offering a settlement to up to 200 taxpayers currently under audit for abusive micro-captive insurance transactions following three court wins backing the government’s position. Micro Captive Insurance

A captive insurance company is basically an insurance company created by a company in order to insure itself. Perhaps because it couldn’t find an outside insurer, or because doing so would present a better financial choice. While such companies are generally legal, the IRS issued a notice saying that, in certain cases, transactions with these captive companies count as tax evasion.

In such cases, the insurer is structured that it can qualify as a small insurance company, at which point it can elect to be taxed only on its investment income. This means that the company that owns the insurer can deduct premiums as business expenses. The premiums do not count as income for the insurer. The IRS noted that in such transactions, the insurer lacks many of the attributes of actual insurance. 

The IRS will continue to disallow the tax benefits claimed in these abusive transactions. They will continue to defend its position in court. The IRS has decided, however, to offer to settle some of these cases. The settlement requires a substantial concession of the income tax benefits claimed by the taxpayer, together with appropriate penalties.

Taxpayers who are eligible for the settlement will be notified of the terms by letter from IRS. The initiative is currently limited to taxpayers with at least one open year under examination. Taxpayers that also have unresolved years under the jurisdiction of the IRS Appeals may also be eligible. 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 opted out will continue to be audited by the IRS under  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 that 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 that 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.

“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.”

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

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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.