IRS Looks To Hire 200 Attorneys To Focus on Abusive Tax Schemes

IRS written on a sign next to a big stack of papers

January 25, 2022

IRS written on a sign next to a big stack of papers

The US Internal Revenue Service's (IRS) office of chief counsel plans to hire up to 200 additional attorneys to focus on abusive tax schemes, including abusive micro-captive arrangements.

An IRS statement said the positions will be available around the country, and the first announcements for the positions have already been posted.

"Combating abusive tax transactions that threaten to undermine our tax system remains a top priority for our enforcement efforts," IRS Commissioner Chuck Rettig said in the statement. "It's critical we work to ensure a fair tax system, and adding these new attorneys will help us in on our ongoing efforts in this arena."

The IRS statement said the newly hired attorneys will help the agency manage the increasing caseload in its multiyear effort to stamp out abusive tax schemes and ensure that participants in them pay the taxes they owe and penalties. The attorneys will provide legal advice to IRS professionals as they audit complex corporate and partnership issues and increasingly sophisticated abusive transactions.

The statement also indicated that abusive micro-captive insurance arrangements remain a key focus of IRS enforcement. "These deals are generally sold to owners of closely held entities," the IRS statement said. "The deals commonly lack many of the necessary attributes of insurance, have excessive premiums, insure highly improbable risks, and have no connection to genuine business and insurance needs."

After a year's absence, abusive micro-captive arrangements returned to the IRS's annual "Dirty Dozen" list of "tax scams" in 2021. 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—were left off the 2020 Dirty Dozen list, the first time in 5 years they weren't included.

Micro-captives have been the target of considerable IRS scrutiny in recent years. 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.

In May, however, the US Supreme Court ruled in favor of captive manager CIC Services in its challenge of an IRS micro-captive reporting requirement. The IRS had claimed that CIC's challenge was prohibited by federal law.

In its ruling in CIC Servs., LLC v. Internal Revenue Serv., No. 19-930, 2021 U.S. LEXIS 2585 (May 17, 2021), the nation's high court overturned a federal district court ruling and remanded the case to the lower court for consideration of CIC's effort to stop the IRS from enforcing its micro-captive reporting requirement set out in Notice 2016-66. The IRS contended that micro-captives are "transactions of interest" that should be reported to the IRS.

January 25, 2022