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IRS Will Mail Settlement Offers to Micro-captive Owners

"Internal Revenue Service" letters on white stone
September 17, 2019

The Internal Revenue Service (IRS) said Monday that it is mailing settlement offers to about 200 owners of so-called 831(b) micro-captives who participated in what the IRS calls "abusive" insurance transactions.

Under Section 831(b) of the Internal Revenue Code, certain small captive insurers can choose to pay federal taxes only on investment income, not their underwriting income.

However, in what the IRS describes as abusive micro-captives, "promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance," the IRS said in its news release announcing the settlement.

While the IRS said it will continue to disapprove tax benefits in abusive transactions and, when necessary, go to court to defend its position, the agency has decided to settle certain cases.

"The IRS is taking this step in the interests of sound tax administration," IRS Commissioner Chuck Rettig said in a statement. "We encourage taxpayers under exam and their advisers to look at the matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases. We will continue to vigorously pursue these and other similar abusive transactions going forward," Mr. Rettig added.

The IRS stated that settlement will require "substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties."

Taxpayers who receive letters under this settlement offer, but who opt not to participate, will continue to be audited by the IRS under its normal procedures and will not be eligible for any potential future settlement initiatives, per the IRS.

The IRS has won several court cases in which the agency said 831(b) captives were used for tax avoidance.

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