The year may have changed, but the Internal Revenue Service (IRS) preoccupation with captives as potential abusive tax shelters remains the same. In a news release dated February 16, 2016, the IRS said that abusive tax shelters and structures used to avoid paying taxes remain a substantial problem. Specified on its list for 2016 is captive insurance.
The IRS explains in the press release that in the abusive structure, 831(b) captives are frequently used by "unscrupulous promoters, accountants, and wealth planners" to create fictitious insurance policies for closely held entities insuring "implausible risks for exorbitant 'premiums.'" Under this scheme, the premiums are often set to reduce taxable income as much as possible.
While the Protecting Americans from Tax Hikes Act of 2015 helped to eliminate some of the abuse, the IRS remains concerned.