The Internal Revenue Service (IRS) has offered a second, stricter, settlement deal for microcaptives under audit.
The service has commenced sending new settlement offers to microcaptives with at least one year under exam.
Microcaptives with a case currently in the US Tax Court are not eligible for settlement offer, but those who received a previous offer they rejected may receive another letter.
The service said that this settlement offer will be “stricter” than the previous offer and that it will be the best a microcaptive can expect.
“Although taxpayers who decline to participate in the settlement will have full Appeals rights, the IRS Independent Office of Appeals is aware of this settlement initiative,” the IRS said.
“Given the current state of the law, taxpayers should not anticipate receiving better terms in Appeals than those offered under this initiative.”
The IRS also stated that the new offer will require a “substantial concession” of income tax benefits claimed.
“The IRS has decided to offer to resolve certain cases by requiring substantial concession of the income tax benefits claimed by the taxpayer together with penalties that can be partly mitigated if the taxpayer can demonstrate good faith, reasonable reliance on an independent, competent tax advisor and if the taxpayer can demonstrate it did not participate in any other reportable transactions,” the organisation stated.
IRS Large Business & International Commissioner Douglas O’Donnell said that the service is committed to targeting “abusive” transactions.
“The IRS maintains a relentless agencywide commitment to combat abusive transactions,” he asid.”Our offer terms are only getting stricter; and taxpayers would be well advised to consult with an objective, competent advisor with the aim of getting out now and putting this behind them.”
Microcaptives who do not take the second settlement offer will continue to be audited in line with normal IRS procedure, outlining potential consequences.
“Potential outcomes include, but are not limited to, full disallowance of captive insurance deductions, inclusion of income by the captive, withholding tax related to any foreign captives, and imposition of all applicable penalties,” the service stated.
In 2016 the IRS issued Notice 2016-66, targeting “abusive” microcaptive transactions they believed have a potential for tax avoidance and evasion. Captive manager CIC Services are currently challenging Notice 2016-66 in the Supreme Court.