The Internal Revenue Service is beginning to make offers to settle some of the Section 831(b) micro captive insurance cases.
You may already be aware that the IRS considers most micro captive cases to be abusive tax shelters. So far taxpayers have lost the only three cases that have been tried in Tax Court. There are many more cases in the IRS audit pipeline and more cases filed or ready to be filed in Tax Court. These settlement offers are intended to reduce the backlog of micro captive cases.
The offer terms are substantial: taxpayers would sacrifice 90% of the tax benefit from deducting premiums paid to the micro captive. In exchange, penalties will be reduced to not more than ten percent and the IRS will not tax premium income to the captive. Gift tax returns may be required in certain circumstances. Unfortunately, the offer is not available to taxpayers with cases that have either been docketed in Tax Court or already decided there.
Needless to say there are other complications and restrictions.