The Internal Revenue Service (IRS) has stated that the “majority” microcaptive cases the service examines are abusive.

A representative from the IRS told the Government Accountability Office (GAO), which supports the audit, evaluation and investigative arm of Congress, that the service had seen thousand of microcaptive cases over only three years.

“Between November 1, 2016, and December 31, 2019, IRS processed disclosures on thousands of micro-captive insurance transactions. IRS has said that the majority of microcaptive cases examined have been determined to be abusive,” a report by the GAO states.

The GAO had been assigned the task of writing a report for Congress on offshore insurance products and the potential for abuse. The report was released on Monday, and contained scores of information on the IRS’ approach to microcaptives.

The GAO reported that “some” microcaptives are formed only to evade tax, and that there were certain indicators if this was the case.

“Sometimes microcaptives are established purely for tax reasons, which generally courts have ruled is improper,” GAO stated. “Indicators that businesses have established a micro-captive in an abusive tax scheme include artificially high premiums that do not make economic sense or that are not supported by actuarial science.”

The report also stated that as of June 2020 the IRS has offered settlements to 156 microcaptives, with 76% of those companies taking the settlement.

The report did however outline that captive insurance companies can be used legitimately, for example to obtain new or better risk coverage due to the tailoring a program, or to benefit from premium savings and profit generation.