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IRS makes settlement offer to 831(b) captive owners

Posted On: Sep. 16, 2019 12:59 PM CST

IRS makes settlement offer to 831(b) captive owners

The Internal Revenue Service on Monday said it would mail settlement offers to up to 200 owners of microcaptives it alleges used so-called 831(b) captives to avoid paying taxes.

The offers come in the wake of three tax court rulings in favor of the IRS in cases involving 831(b)s.

“We encourage taxpayers under exam and their advisors to take a realistic look at their matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases.  We will continue to vigorously pursue these and other similar abusive transactions going forward,” IRS Commissioner Chuck Rettig said in a statement.

According to the statement, the settlement requires “substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties.”

Captives electing Section 831(b) of the Internal Revenue Code are taxed only on their investment income, not their underwriting income. The premium limit for the captives is $2.3 million.

The 831(b) captives are 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, their family members and others to create the appearance of insurance coverage while being used to avoid tax.

The IRS is investigating hundreds of the captives and has won several key court rulings. The first was the so-called Avrahami case, involving a jewelry business in Phoenix, which it won in 2017.

The Avrahami’s later sued the lawyer who allegedly advised them to set up the captive.

The other two cases involved a captive for a mining company and another for a steel tank manufacturer.