For years I have been authoring articles and speaking at national conventions about the IRS attacks on tax shelters like 419, 412i, section 79 and captive insurance.
The Internal Revenue Service today warned taxpayers to be wary of abusive tax shelters, which remain on the "Dirty Dozen” tax scams.
These sophisticated schemes, particularly those involving micro-captive insurance shelters, can be peddled by promoters and others to avoid taxes.
The annually compiled “Dirty Dozen” list describes a variety of common scams that taxpayers may encounter. Many of these schemes peak during tax season, and the agency wants taxpayers to remain on alert for them.
These scams can range from simple schemes to inflate refunds to more elaborate efforts related to tax shelters.
Through audits, litigation, published guidance and legislation, the IRS continues to address those using abusive micro-captive insurance tax shelters.
Tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Traditional captive insurance typically allows a taxpayer to reduce insurance costs. The insured business claims deductions for premiums paid for insurance policies. Those amounts are paid, either as insurance premiums or reinsurance premiums, to a “captive” insurance company owned by the insured or parties related to the insured.
Under section 831(b) of the tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income so that the captive insurer pays tax only on its investment income.
In certain “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of genuine insurance.
For example, coverages may insure implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages. Premium amounts may be unsupported by underwriting or actuarial analysis, may be geared to a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage. Policies may contain vague, ambiguous or deceptive terms and otherwise fail to meet industry or regulatory standards. Claims’ administrative processes may be insufficient or altogether absent. Insureds may fail to file claims that are seemingly covered by the captive insurance.
Micro-captives may invest in illiquid or speculative assets or loans or otherwise transfer capital to or for the benefit of the insured, the captive’s owners or other related persons or entities. Captives may also be formed to advance inter-generational wealth transfer objectives and avoid estate and gift taxes. Promoters, reinsurers and captive insurance managers may share common ownership interests that result in conflicts of interest.
In Avrahami v. Commissioner, the U.S. Tax Court disallowed premium deductions the taxpayer had claimed under a section 831(b) micro-captive arrangement, concluding that the arrangement was not “insurance” under long established decisional law principles. To qualify as insurance under those principles, an arrangement must involve risk shifting, risk distribution and insurance risk, and must also meet commonly accepted notions of insurance. The Avrahami court concluded that the taxpayer’s arrangement failed to distribute risk and that the taxpayer’s captive was not a bona fide insurance company. The court pointed to a number of facts that it found problematic, including circular flows of funds, grossly excessive premiums, non-arm’s length contracts, and an ultra-low probability of claims being paid. The court also concluded that the arrangement was not insurance in the commonly accepted sense, due in part to haphazard organization and operation, the captive’s investments in illiquid assets, unclear policies, and inflated premiums.
In Notice 2016-66 , the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as “Transactions of Interest.” The notice established reporting requirements for those entering into such transactions , and created disclosure and list maintenance obligations for material advisors.
Separately, Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective Jan. 1, 2017, established strict diversification and reporting requirements for new and existing captives.Type your paragraph here.
Happy New Year Mr. Wallach and thanks for the article:
Ronald R. Itzkowitz
National EP Customer Partnership Analyst
Internal Revenue Service - Employee Plans
"Mr. Wallach, thanks so much for taking the time to talk to me today about VEBAs. Any information you can
send me would be helpful. Hopefully, we can work together in the future as interest in VEBAs increase."
Corman G. Franklin Office of the Assistant Secretary for Policy U.S. Department of Labor
Every one of our consulting attorneys, CPAs & ex IRS Agents has more
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We provide expert witness testimony and other services for clients with captive insurance problems.
Don’t let someone do the disclosure form for you unless they are a CPA with years of experience successfully doing the disclosure forms. We also suggest the CPA that does the disclosure form be done by an Ex- IRS agent who has many years of tax experience.
If the captive refers you to someone for the forms, they are probably protecting THEMSELVES and NOT YOU.
You need someone who specializes with theses disclosure forms. We suggest that the CPA that prepares the form be totally independent from the captive. The most Important question to ask the CPA is how many disclosure forms have they properly prepared.
Remember you get what you pay for. If the forms are done cheaply, you will PAY a lot when the IRS gets you.
For the last few years some captive insurance plans are being looked at and audited. If you are in a captive, which may be legal, you still may have to file under IRS 6707A. Most people who file do it wrong and then you have compounded the problem by lying to the IRS. Make one mistake on the forms and you have another problem.
On November 1, 2016, the Internal Revenue Service (“IRS”) issued Notice 2016-66 identifying certain transactions relating to small captive insurance companies as a “transaction of interest.” Prior to this notice, the IRS had identified certain small captives as amongst its list of “Dirty Dozen Tax Scams.” Also, the IRS has been actively examining captives and their owners and litigating cases in the U.S. Tax Court. The new “transaction of interest” designation throws small captive insurance company transactions into a tax reporting regime that can potentially lead to significant penalties and IRS income tax and promoter examinations..
Great to speak with you and attached are some articles on 419, 412i section 79 etc.
From: Amanda.Andrews To: LanWalla@aol.com
Thank you for providing me with this information. I will review it next week and, I’m
sure, be in touch. I very much appreciate your help.
Amanda J. Andrews
Associate Counsel, Legal Division
Arkansas Insurance Department
If you are considering a captive contact our experts. We provide an objective professional assessment.
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Understanding Captive Insurance Problems and IRS Audits
If you were using a Section 79 plan, 412(i) plan, or 419 plan and have received a notice that you are being audited by the IRS you may be subject to huge fines and penalties. Get help with this problem before the IRS takes all your money.
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