IRS expands enforcement focus on abusive micro-captive insurance schemes

IRS on abusive micro-captive insurance schemes

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.

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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.

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