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IRS urges participants in ‘abusive’ micro-captives to opt out now

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Internal Revenue Service officials are once again urging participants in “abusive” micro-captivity deals to end these transactions as soon as possible.

The IRS considers that many micro-captive arrangements are not really about insurance. The IRS has intensified reviews of these arrangements in recent years. In 2020, the agency deployed 12 micro-captive review teams to dramatically increase reviews of ongoing abusive micro-captive insurance transactions.

Adding to its argument, the IRS has just won another case in the United States Tax Court that such arrangements do not qualify for the tax benefits claimed because they are not genuine arrangements. insurance.

On March 10, 2021, the U.S. Tax Court ruled in Caylor Land & Development v. Commissioner, TC Memo. 2021-30 (2021), that another micro-captivity arrangement was not considered insurance for federal tax purposes. In this case, a $ 1.2 million deduction by an Arizona construction company for what it characterized as insurance premiums paid to its captive insurer was inappropriate because the entity paid did not spread the risk and did not sell insurance in the commonly accepted sense.

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This decision follows several previous Tax Court decisions that also upheld the IRS’s findings that certain micro-captivity arrangements did not qualify for the federal tax benefits claimed. In Caylor, the Tax Court also upheld the IRS’s determination of the accuracy penalties and rejected the taxpayer’s claim to rely on tax advice.

“In many court cases, judges have held that these ‘fancy’ and ‘unreasonable’ arrangements do not amount to assurance in the commonly accepted sense,” said IRS Commissioner Chuck Rettig. “I urge the participants in these arrangements to seek independent legal advice from those who have helped them direct them towards these abusive arrangements.”

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The IRS has said it will ban tax benefits from transactions deemed abusive and may also require domestic captives to include premium payments in their income and impose withholding tax on foreign captives. The IRS has said it will continue to impose penalties, including the strict liability penalty that applies to transactions devoid of economic substance.

Under a micro-captivity agreement, the net premium paid by a taxpayer cannot exceed $ 2.2 million (before 2017, the cap was $ 1.2 million) and the captive is taxed only on taxable investment income.

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In its Notice 2016-66, the IRS indicated that micro-captive insurance transactions have the potential for tax evasion or evasion.

While some taxpayers have challenged the IRS’s position in court, none have succeeded, according to the IRS. The IRS began sending out offers in 2019. The agency said there were more than 500 court cases at that time. The IRS said in January 2020 that nearly 80% of taxpayers had accepted its earlier settlement offer made in September 2019,

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In March and July 2020, the IRS again issued letters alerting taxpayers who participated in a Notice 2016-66 transaction relating to expedited IRS enforcement activity and giving them the opportunity to say to the IRS if they stopped participating in this transaction before the IRS. start the exams.

The IRS said responses indicate that a “significant number” of taxpayers who participated in these transactions have left but have not given numbers.

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