Internal Revenue Service Responds to SCCIA Micro-Captives Request

"Internal Revenue Service" lettering on white stone

January 04, 2021

"Internal Revenue Service" lettering on white stone

The Internal Revenue Service (IRS) has responded to a request from the South Carolina Captive Insurance Association (SCCIA) that the IRS withdraw letters sent to the "micro-captive" industry and that it suspend audits of so-called micro-captives until the COVID-19 crisis passes.

In December, the SCCIA received a response from the IRS stating it is encouraging taxpayers to consult a tax advisor and to notify the IRS if any micro-captives have discontinued taking deductions or any other tax benefits, according to the association.

According to the SCCIA, the letter from the IRS made reference to precedent that, in the view of the service, provides significant guidance regarding contracts issued by companies that have made an election under section 831(b) of the Internal Revenue Code. The IRS also said it would consider whether additional guidance or regulations should be published in light of the existing precedent.

The SCCIA had also requested that in the future the IRS focus its examination of micro-captives by limiting the administrative and regulatory burdens imposed on the small insurance companies where there is little evidence the benefits provided by section 831(b) have been misused.

The South Carolina captive insurance group had also asked the IRS to adopt regulations or guidance regarding its treatment of insurers who have made the 831(b) election, noting that such regulations or guidance would help remove uncertainty regarding the parameters the IRS currently employs regarding taxpayers making the 831(b) election.

"We are delighted to receive a response from the IRS," said Gary Osborne, president of the SCCIA. "While it is not assertive as we would like, we are pleased that they will give the matter additional consideration. The fact they are engaging with us is certainly positive."

So-called micro-captives, small captive insurance companies that elect to be taxed under section 831(b) of the Internal Revenue Code, which allows small insurance companies to be taxed only on their investment income, have been the target of IRS scrutiny in recent years. Until this year, micro-captives had been included for several years on the IRS's annual "Dirty Dozen" list of potentially abusive transactions.

The IRS has won several tax cases against such small captive insurance companies, though many in the industry, including some domicile organizations, have suggested the federal tax agency has gone overboard in its scrutiny.

January 04, 2021