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The IRS on Friday urged participants in “abusive” microcaptive insurance arrangements to exit the programs and warned that it would issue penalties against such captive owners.
The statement comes a month after the IRS scored its fourth tax court victory against so-called 831(b) microcaptives.
The captives are only taxed on investment income — not underwriting income – provided their annual premiums don’t exceed a cap of $2.3 million. Microcaptive advocates say the programs provide smaller organizations with an opportunity to enter the captive market, but critics say they can be used as tax avoidance schemes by wealthy families and individuals.
“In multiple cases before the courts, judges have held that these ‘fanciful’ and ‘unreasonable’ arrangements don’t add up to insurance in the commonly accepted sense,” said IRS Commissioner Chuck Rettig in the statement. “I strongly urge participants in these arrangements to get independent legal advice separate from those who helped steer them into these abusive arrangements.”
Microcaptive owners also should consult with an independent tax adviser before filing their 2020 tax returns, the statement said.
The IRS will disallow tax benefits from microcaptive transactions that are deemed abusive, the statement said.
“The IRS will continue to assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance,” it added.
The U.S. Supreme Court on Monday agreed to hear a case involving a captive manager’s challenge to an Internal Revenue Service notice on microcaptives that stated they could be used for tax evasion and labeling them “a transaction of interest” reportable to the IRS.