The IRS today issued a release indicating that it has expanded its enforcement focus on taxpayers that have engaged in abusive micro-captive insurance transactions.
The IRS release—IR-2020-226—cautions taxpayers to consider certain steps before the October 15, 2020 filing deadline.
Notice 2016-66 [PDF 44 KB] (November 2016) identified a type of transaction involving a “micro-captive insurance” structure as a “transaction of interest”—i.e., a tax avoidance transaction—for purposes of Reg. section 1.6011-4(b)(6) and sections 6111 and 6112. The notice stated that these “micro-captive transactions” have the potential for tax avoidance or evasion, and that taxpayers engaged in these transactions must disclose the transactions. A failure to disclose will be subject to the penalty under section 6707A or section 6707(a).
Notice 2016-66 stated that the IRS and Treasury recognize that related parties may use captive insurance companies that make elections under section 831(b) for risk-management purposes that do not involve tax avoidance. Yet, there are instances in which the use of such arrangements to claim the tax benefits of treating the transaction as an insurance contract is improper.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in 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.