Microcaptive may owe IRS $2m

A microcaptive owner may still have to pay $2 million in tax and penalties after an appeal to the US Tax Court.

In Patel v CIR (Commissioner of Internal Revenue), the court ruled on if the IRS followed proper procedure when assessing penalties.

The initial assessments found that the microcaptive owed the IRS $1.73 million in tax and an additional $397,068 in penalties for the 2013-2017 tax years, a grand total $2.13 million.

The microcaptive owners, husband and wife Dr Sunil Patel and Mrs Laurie McAnally Patel, challenged the assessment in the US Tax Court.

The opinion found that some of the penalties for the 2013 tax year were not acquired through proper process.

This means that while some of the 2013 penalty of $99,157 may not be applied as the IRS did not follow proper procedure, the microcaptive may still owe the IRS $2.03 million.

The trial for the underlying tax assessments was due to be heard in June of this year, but has been postponed due to the Covid-19 pandemic. This trial will determine if the initial assessments and penalties apply.

Petitioners and microcaptive owners Dr and Mrs Patel formed a microcaptive and “several related entities” for their business Ophthalmology Specialists of Texas, PLLC (OST).

“Dr. Patel is an ophthalmologist who was the sole shareholder of Ophthalmology Specialists of Texas, PLLC (OST),” the opinion states.

“He engaged in a purported microcaptive insurance arrangement for this business. In the process he formed several related entities through which petitioners deducted purported insurance premiums as business expenses during the years at issue.”

In February 2016, the IRS began an investigation into the microcaptive’s 2013 tax return. In the 2017 the IRS expanded the investigation to include the 2014, 2015 and 2016 tax years.

In May 2017 a letter and Revenue Agent’s Report (RAR) of the petitioner’s 2013 tax return was sent to them by the IRS.

“The RAR proposed changes in petitioners’ income tax for the 2013 tax year, including an adjustment to the amount of income they reported for that year and the imposition of accuracy-related penalties under section 6662(a), (b)(2) and (6), and (i),” the opinion stated.

Over the next year and a half the IRS sent more RARs to the microcaptive relating to the 2014, 2015 and 2016 tax years. In December 2018 the petitioners filed with the court appealing all four assessments, with the opinion on the case published in late September 2020.

A previous version of this story said that the microcaptive owed the IRS the tax assessment and penalties. This has been amended to state that the microcaptive may owe penalties dependent on the out coming of the trial. 

8 August 2022
8 November 2022
9-10 November 2022
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