IRS expands captive enforcement

The Internal Revenue Service (IRS) has expanded its enforcement focus into “abusive” microcaptives and advised captive owners to dump their captive.

In a strong statement, the IRS frequently called microcaptives abusive, as well as threatening harsher settlement offers and taking cases to the Tax Court.

“These taxpayers should seriously consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions,” a statement from the IRS said.

“For those taxpayers that do not exit the transaction and continue taking such deductions, the IRS will disallow tax benefits from transactions that are determined to be abusive and may also require domestic captives to include premium payments in income and assert a withholding liability for foreign captives.”

The tax authority also said that anyone who participated in a microcaptive transaction should consult a tax advisory prior to the 15 October filing deadline.

In the statement the IRS also said that future settlement offers will not be as good as current offers, with “additional concessions” applied going forward, adding that the IRS is ready for long court battles.

“The IRS will also assert penalties, as appropriate, including the strict liability penalty that applies to transactions that lack economic substance. The IRS Office of Chief Counsel is well prepared to defend these positions in Tax Court,” the organisation said.

Captive manager CIC Services is currently challenging the validity of the IRS’ Notice 2016-66 in the US Supreme Court. In July a coalition of captive industry associations submitted an amicus brief in support of CIC Services.

Microcaptives “remain a priority enforcement issue for the IRS” with IRS Commisioner Chuck Rettig saying the service “has never been better positioned” to focus on microcaptives.

“The IRS enforcement efforts will continue on these abusive transactions,” Rettig said. “Any future settlement terms will only get worse, not better.

“The IRS has never been better positioned in its quest to eradicate abusive transactions following the stand-up of a dedicated promoter office, a new Fraud Enforcement Office, enhanced service-wide coordination with Criminal Investigation and the Office of Professional Responsibility, and our advanced data analytics and mining capabilities.

“Taxpayers are strongly encouraged to use this opportunity to put this behind them and get into the compliance.”

Earlier this year microcaptives were removed from the IRS “dirty dozen” list, but are still a focus of the IRS.

The IRS also said they will be investigating “variations” on abusive microcaptive structures, pointing to offshore captives- not just microcaptives- domiciled in Puerto Rico.

“Other variations (of captives) appear to be designed and marketed with the express intent of avoiding reporting under Notice 2016-66 and yet perpetuating in some cases the same or similar abusive elements as abusive micro-captive insurance transactions,” the service said. “The IRS is aware of these abusive transactions and is actively working to counter their proliferation.”

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