Micro-Captive insurance companies, those organized under §831(b) of the Internal Revenue Code, have been under scrutiny by the IRS for several years.
This provision was purposely created by Congress to enable businesses to exercise greater control over their insurance programs. The micro-captive insurance principles are sound and can be used to considerable advantage when properly managed. Unfortunately the micro-captive business became corrupted by a few tax shelter promoters who widely touted the micro-captive as an estate planning device paid for with income tax deductions. Those promoters sponsored, and administered, poorly structured insurance programs, covering risks unlikely to produce losses charging excessive premiums which had often been set without the benefit of proper actuarial attention.
The fallout has been a vigorous IRS attack against micro-captives followed by a settlement offer extended to around two hundred taxpayers. Terms are quite unfavorable to taxpayers, but settlement does allow taxpayers to avoid litigation and possibly larger penalties. Nearly 80% of offerees accepted the offer.
Those taxpayers who did not accept the offer and the thousands of other taxpayers who have utilized micro-captives are about to be targeted by twelve new IRS examination teams in the coming months.
If you have a micro-captive and did not receive the offer or you received the offer but did not accept it, you would be wise to call us or another tax professional soon.
This post was written by LeRoy Metz