In the News
IRS Says It Puts an End to Misuse of Microcaptives

• Frank Klimko
• March 2020
• 

The Internal Revenue Service has triumphed in its crackdown on microcaptive insurance arrangements operating as illegal tax dodges, according to the agency, which said roughly 80% of the 200 companies under investigation have agreed to settlement offers.

“The overwhelming acceptance rate of the private settlement offer is a reflection of the success of the government's work to stop this abuse,” IRS Commissioner Chuck Rettig said in a statement. “Taxpayers who elected to accept the IRS' terms have done the right thing by coming into compliance with their federal tax obligations and putting this behind them.”

Last fall, the IRS sent out letters offering agreements to 200 companies under agency investigation for allegedly using abusive microcaptive insurance arrangements.

The companies are accused of abusing the 831(b) captive rules. Abusive microcaptive transactions have appeared on the IRS “dirty dozen” list of taxation scams since 2014, the IRS said. The IRS is concerned some 831(b) captives are being marketed for abusive purposes in estate planning rather than risk mitigation.

Under the proposed settlement, companies would have to forgo their claimed tax benefits and agree to the imposition of some penalties, the IRS said. Those who reject the offer were warned they could not expect a better deal later on. Exact settlement terms would vary from company to company and the names of the companies were not released. The IRS launched the settlement initiative after three consecutive U.S. Tax Court wins in cases, which sought to overturn the IRS interpretation of the 831(b) captive rules.

For the approximately 40 firms that did not accept the offer, the IRS will deploy 12 new audit-examination teams.

“Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity and imposition of all applicable penalties,” the agency said.

The 831(b) captives—also known as microcaptives or enterprise risk captives—emerged from tax law changes in 1986 as an effort to help farm mutuals and small- and medium-size businesses mitigate risks they couldn't necessarily do in the commercial market. Since then, the 831(b) captive space has grown beyond just the farm mutuals.

It's now used as a much larger risk mitigation tool for family-owned small businesses and medium-size businesses.