The IRS is Continuing to Target Micro-Captive Insurance Transactions

In March of 2020, the Internal Revenue Service (IRS) began sending warning letters to micro-captive insurance companies and their clients. This initiative was based on information the IRS received from various sources indicating that some micro-captive insurance companies were engaging in abusive practices—with tax fraud implications. As the IRS explains:

“Tax law generally allows businesses to create ‘captive’ insurance companies to protect against certain risks. Under section 831(b) of the Internal Revenue Code, certain small insurance companies can choose to pay tax only on their investment income. In abusive ‘micro-captive’ structures, promoters, accountants or wealth planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of genuine insurance.”

Our New Jersey tax defense lawyer knows that if you own a micro-captive insurance company, you may be aware that the IRS’ focus on the industry is not entirely new. Abusive insurance transactions have frequently appeared on the IRS’ “Dirty Dozen” list over the past decade. But the IRS’ current focus on the micro-captive insurance industry appears to be particularly strong. Following the initial round of warning letters in March, the IRS sent another round in July, and then it sent a third round in October.

Should Your Company Consider the IRS’ Micro-Captive Insurance Settlement Offer?

The IRS has put forth a settlement offer to companies currently facing audits pertaining to possible abusive micro-captive insurance transactions. The October round of letters offers “stricter” settlement terms, and a news release announcing the latest round of letters makes clear that the IRS is continuing to aggressively target the industry:

“In the coming days, the IRS will begin sending settlement offers with terms that are stricter than the IRS' first time-limited initiative started last year. This announcement occurs after the IRS recently deployed its 12 newly formed micro-captive examination teams to substantially increase the examinations of abusive micro-captive insurance transactions.”

The news release goes on to make clear that companies that do not participate in the settlement initiative (with its now-stricter terms) will “continue to be audited by the IRS under its normal procedures.”

Given the current circumstances, if your company is being audited, should you consider settling with the IRS? As with all IRS matters, you need to make an informed decision based on the advice of an experienced New Jersey tax defense lawyer. While settling might be your company’s best option, there are risks involved with voluntarily admitting tax law violations to the IRS, and you will need to approach any settlement negotiations cautiously with due consideration for all possible negative ramifications.

What about Micro-Captive Insurance Companies that Haven’t Received IRS Warning Letters?

What if you have not received a warning letter from the IRS? In this scenario, you would be well-served to discuss your company’s risks with a New Jersey tax defense lawyer before the IRS comes calling. If your company has committed federal tax law violations, addressing the issue proactively will serve to help mitigate any potential penalties.

Schedule a Confidential Consultation with a New Jersey Tax Defense Lawyer Today

Has your company received a warning letter from the IRS? Or, are you seeking to get out in front of a potential IRS audit? If so, we encourage you to get in touch. To speak with New Jersey tax defense lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-355-8202, email ket@thornlawgroup.com or contact us online today.