IRS Indicates It's Stepping Up Enforcement of Abusive Micro-Captives

The words INTERNAL REVENUE SERVICE in large black letters attached to a concrete building

October 06, 2020

The words INTERNAL REVENUE SERVICE in large black letters attached to a concrete building

The Internal Revenue Service (IRS) has indicated that it's expanding its enforcement focus on abusive micro-captive schemes, encouraging taxpayers participating in micro-captive arrangements to consult an independent tax adviser ahead of the October 15 filing deadline.

"The IRS encourages any taxpayer who has continued to engage in an abusive micro-captive insurance transaction to not anticipate being able to settle its transaction with the IRS of Chief Counsel on terms more favorable than previously announced settlement offers and that any potential future settlement initiative that the IRS may consider will require additional concessions by the taxpayer," the IRS said in a statement.

The IRS statement said that taxpayers participating in micro-captive arrangements should "seriously consider" exiting the transaction and not claim deductions associated with abusive micro-captive transactions.

The statement said the IRS will disallow tax benefits from transactions determined to be abusive and may also require domestic captive insurance companies to include premium payments in income and assess a withholding liability related to offshore captives.

The IRS will also impose appropriate penalties, the statement said, including the strict liability penalty applied to transactions that lack economic substance under the tax code. "The IRS Office of the Chief Counsel will continue to litigate these abusive transactions in Tax Court," the statement said.

"The IRS enforcement efforts will continue on these abusive transactions," IRS Commissioner Chuck Rettig said in the statement. "Any future settlement terms will only get worse, not better. The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities."

October 06, 2020