IRS “insensitive and draconian” over micro captive letters

The Self-Insurance Institute of America (SIIA) has written to the Internal Revenue Service (IRS) over the treatment of micro captives during the coronavirus pandemic.

On 20 March IRS sent approximately 150,000 letters to captive insurance companies who take 831(b) election, four days after the National Covid-19 Emergency Declaration.

As of the 20 March, the US had more than 19,000 confirmed Covid-19 cases. As of 1 April, the US had more than 189,000 confirmed cases.

The IRS letter stated that: “Several U.S. Tax Court decisions have confirmed that certain micro-captive arrangements are not eligible for claimed Federal tax benefits.

“We’re notifying you regarding IRS compliance activity in this area so you can make informed decisions about claiming tax deductions for micro-captive insurance premiums.”

SIIA took umbridge with the letters, and has written to the IRS asking them to revoke the letter and suspend audit activity until the National Covid-19 Emergency Declaration is withdrawn.

The letter, written by SIIA vice president Ryan C. Work, criticises the IRS for sending the letters during a this time and praises captive insurance companies for their work during the pandemic.

“Despite the malignment of enterprise risk captives, or ‘micro-captives,’ by the Internal Revenue Service (IRS), these same captive insurance companies are now being vindicated as they help numerous companies survive the Covid-19 crisis and beyond,” Work wrote in the letter.

“Due to the lack of insurance capacity in the commercial market, a significant portion of insurance risk has been
placed in the captive market. There is little doubt that captives will be paying a significant number of claims to their insureds resulting from the current crisis.”

Work said that captive owners felt “astonishment and frustration” when they received the letter, especially given the IRS asked for information by 4 May or face the risk of audit.

“As if the IRS could not have done something more clearly insensitive, thoughtlessly timed or astonishingly draconian, the IRS Letter, itself, is so unclear that taxpayers making good faith efforts to comply could inadvertently put themselves in a position to be accused of perjury,” Work wrote to IRS secretary Steven Mnuchin and IRS Commissioner Charles Rettig.

While the SIIA says they appreciate that the IRS needs to investigate abusive captive practices, their stance is that the timing of the letters is not appropriate.

Work told Captive Review that in addition to writing to the IRS, SIIA had also communicated their request for a revocation of the IRS letter and halting of audits to Congress.

12 August 2024
5-6 November 2025
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