IRS makes second settlement offer to microcaptive owners

The IRS on Thursday said it would make another settlement offer to microcaptive owners whom it alleges breached tax rules through their abuse of the alternative risk transfer vehicles.

In a statement, the IRS said that “in the coming days” it will send settlement offers that are stricter than the offers it made to about 200 owners last year.

“This announcement occurs after the IRS recently deployed its 12 newly formed micro-captive examination teams to substantially increase the examinations of abusive micro-captive insurance transactions,” the IRS said.

Under the terms of the settlement, the IRS is “requiring substantial concession of the income tax benefits claimed by the taxpayer together with penalties that can be partly mitigated if the taxpayer can demonstrate good faith, reasonable reliance on an independent, competent tax advisor and if the taxpayer can demonstrate it did not participate in any other reportable transactions,” the statement said.

The new settlement offer will be limited to owners of microcaptives, or 831(b) captives, who have at least one open tax year under examination. Owners with tax years docketed in tax court will not be eligible, the statement said.

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 companies 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 has won several key court rulings concerning microcaptives. The first was the so-called Avrahami case, involving a jewelry business in Phoenix, which it won in 2017.