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IRS update on "micro-captive insurance transactions”

IRS update on "micro-captive insurance transactions”

The IRS today released an update on “abusive micro-captive insurance transactions.”

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According to the IRS release—IR-2020-26—nearly 80% of taxpayers who received a time-limited settlement offer elected to accept the settlement terms. In addition, the IRS is establishing 12 new examination teams that are expected to open audits related to thousands of taxpayers in coming months.

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. Read TaxNewsFlash

The settlement offer followed three U.S. Tax Court decisions holding that certain micro-captive arrangements are not eligible for federal tax benefits. Read TaxNewsFlash reports from April 2019, June 2018, and August 2017 on these court cases. 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. Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the 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.

 

For more information, contact a KPMG tax professional:

Sheryl Flum | +1 (202) 533-3394 | sflum@kpmg.com

Fred Campbell-Mohn | +1 (212) 954-8316 | fcampbellmohn@kpmg.com

William Olver | +1 (617) 988-1642 | wolver@kpmg.com

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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