The Internal Revenue Service has announced an overwhelming acceptance rate for a time-limited settlement offer made to certain taxpayers under audit who participated in abusive micro-captive insurance transactions. Nearly 80% of taxpayers who received offer letters elected to accept the settlement terms. In addition, the IRS is establishing 12 new examination teams that are expected to open audits related to thousands of taxpayers in coming months.

Abusive micro-captives have been a concern to the IRS for several years. The transactions have appeared on the IRS “Dirty Dozen” list of tax scams since 2014. In 2016, the Department of Treasury and IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion. Following wins in three recent U.S. Tax Court cases, in September 2019, the IRS decided to offer settlements to taxpayers currently under exam and thereafter sent notices to up to 200 taxpayers. The terms of the settlement required substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties.

“The overwhelming acceptance rate of the private settlement offer is a reflection of the success of the government’s work to stop this abuse,” said IRS Commissioner Chuck Rettig. “Taxpayers who elected to accept the IRS’ terms have done the right thing by coming into compliance with their federal tax obligations and putting this behind them. Putting an end to abusive schemes is a high priority for the IRS.”

The IRS also announced that it will continue to vigorously pursue those involved in these and other similar abusive transactions going forward.  Enforcement activity in this area is being significantly increased, including the establishment of 12 new examination teams comprised of employees from the IRS Large Business and International and Small Business/Self-Employed divisions. These teams will use all available enforcement tools, including summonses, to obtain necessary information.

Examinations impacting micro-captive insurance transactions of several thousand taxpayers will be opened by these teams in the coming months. Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity, and imposition of applicable penalties.

Finally, the IRS reminded taxpayers and advisors that disclosure of participation in micro-captive insurance transactions to the IRS Office of Tax Shelter Analysis is required under Notice 2016-66. Taxpayers involved in these types of transactions should immediately consult with independent, competent tax advisors on the proper treatment for past and future tax years to consider best available options.

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