The past several months have seen positive and negative developments for owners of so-called 831(b) captive insurers, and the year ahead may yield more changes.

On the positive side, the premium cap on the microcaptives was raised in January — the first increase in 30 years — to $2.2 million from $1.2 million. That increase makes the captives increasingly attractive as alternative risk transfer vehicles for larger companies, captive experts say.

But on the negative side, last month the Internal Revenue Service again listed 831(b) captives on its “Dirty Dozen” list of tax scams. In addition, last November the IRS issued a notice stating that it believes 831(b) transactions have “a potential for tax avoidance or evasion” and demanded more information on the vehicles from 831(b) owners.

More changes, as yet unknown, are expected later this year when courts rule in test cases brought by the IRS that allege abuse of microcaptives.

831(b) captives have become increasingly popular over the past several years. Captives electing Section 831(b) of the tax code for insurers are taxed only on their investment income, not their underwriting income.

In the past, 831(b) captives were often used by small and midsize firms that are too small to establish conventional captives, but many observers say they have also been used by wealthy individuals and others to avoid tax.

While several captive management experts say they have seen a slowdown in microcaptive formations over the past several months as prospective owners await more clarity from the IRS, the increase in the premium cap has generated more interest in the vehicles, particularly from larger firms.

“The overall increase to $2.2 million really opens up the ability of 831(b)s to be a true risk management vehicle for midsized companies, so we view it as a net positive,” said Ernie Achtien, executive vice president of enterprise risk management at Captive Resources L.L.C. in Schaumburg, Illinois.

Companies that are looking to form 831(b) captives now include larger firms that wouldn’t have considered 831(b)s under the previous $1.2 million cap, said Mike Serricchio, Norwalk, Connecticutbased senior vice president at Marsh Captive Solutions, a unit of Marsh L.L.C.

“The increase to $2.2 million is opening the door to larger private companies and even smaller public companies that are thinking about captives,” he said.

The increase has widened the appeal of 831(b) captives, with companies with annual revenue of $500 million and up examining the vehicles, said Adam Forstot, Greenville, South Carolina-based vice president of business development at USA Risk Group Inc.

“A lot of larger companies who may have looked at a captive and determined that for a variety of reasons that it may not have been attractive, are now looking more closely because the $2.2 million limit may give the captive more value,” he said.

While 831(b) captives can be used to cover high-frequency risks that traditionally are covered in all sizes of captives, such as general liability and workers compensation, they are often used to cover lower-frequency exposures, such as cyber risks, property wind deductibles and product recall exposures, for example.

And the microcaptives can be a stepping stone to larger captive structures, Mr. Serricchio said.

Captive owners can fund “some of those more nontraditional, more exotic lines in their captive, but they are also going to build the captive to become a larger captive in the future,” he said.

But 831(b) owners do face some immediate challenges. In November 2016, the IRS issued Notice 2016-66 naming 831(b) captives as a “transaction of interest” and required microcaptive owners to file detailed information on the vehicles and the risks they cover going back as much as 10 years.

The extended deadline to file the information is May 1, and there is an expectation that the IRS will require the information to be filed annually going forward.

Although captive industry organizations are lobbying to have the requirements of the notice delayed or scrapped, several captive managers say that for corporate owners who use 831(b) captives for legitimate risk management purposes, the requirements are more of an onerous administrative burden than a threat to the captives.

“The worst that can happen really is that we are required to file, and we do,” said Martin Eveleigh, chairman of Atlas Insurance Management in Charlotte, North Carolina.

“If it discourages those few people who were looking to use this as an estate planning tool, well, that’s fine,” he said.

“While there’s a negative to this IRS scrutiny, we also believe that this will weed out the players out there that aren’t doing these captives correctly,” said Mr. Achtien of Captive Resources.

And for larger captive owners, the IRS is asking for information that they already have and are used to dealing with, said Mr. Forstot of USA Risk.

“They will have a thorough feasibility study with detailed actuarial (analysis); they are going to have very detailed policies and risk analysis, and they are writing traditional lines of coverage with established policy forms,” he said.

While the notice may discourage smaller companies that are considering forming an 831(b), larger companies have not been deterred, said Mr. Serricchio of Marsh.

“A lot of clients that we do business with that we’ve brought the idea to in the last year weren’t really affected by the notice — it’s just another level of compliance that they are used to,” he said.

Another potential challenge on the horizon are U.S. Tax Court cases that are expected to be ruled on this year and next year. The case expected to be ruled on first is Avrahami v. Commissioner, where the IRS alleges that a St. Kitts-licensed 831(b) captive for a jewelry business in Phoenix that ostensibly covered terrorism risks for a pool of third-party insureds was really being used for estate planning.

Among other things, the IRS alleged that the captive made loans to entities controlled by the owner’s family members to purchase real estate; that the policies were vague; and the premium amounts were not reasonable.

The Tax Court rulings will likely provide guidance for 831(b) owners, said captive law expert Charles J. Lavelle, senior partner at Bingham Greenebaum Doll L.L.P. in Louisville, Kentucky.

The court rulings will provide guidance to both the IRS and the captive owners on “what’s proper and what’s improper,” Mr. Lavelle said.

The cases will likely go through an appeals process and other cases will be brought, but “I think in three to five years we’ll reach a new equilibrium and the courts will help us understand what that equilibrium is,” he said, noting that “in tax years that’s not that long.”