The Internal Revenue Service has pumped up the volume on their efforts to go after fraudulent 831(b) captives and their promoters. And although no industry likes the thought of being singled out by our nation’s tax collectors, it is hardly surprising.

Solomon Teague of Captive International recently reported that the IRS has scored some notable victories against abusive micro-captive insurance tax shelters in recent years, with settlement offers to some 200 captives last September. Flush with victory, the IRS has established 12 new examination teams to go after taxpayers using 831(b) captive insurance vehicles to avoid paying taxes, thereby significantly ramping up the pressure that has grown up around these shelters.  It will open additional examinations and use all available enforcement tools, including summonses, to obtain the necessary information, the IRS said in its statement.

The IRS has been concerned about abusive micro-captives for several years. It has named these transactions on its Dirty Dozen list of tax scams since 2014. In 2016, the Department of the Treasury and IRS issued Notice 2016-66, identifying certain micro-captive transactions as having the potential for tax avoidance and evasion.

As Solomon reported, the IRS’s position was bolstered by three US Tax Court decisions, each confirming that certain micro-captive arrangements are not eligible for federal tax benefits, along with settlement offer letters to “up to 200” micro-captives that it suspected were not engaged in legitimate insurance activities. According to the IRS, nearly 80 percent of taxpayers who received its settlement offer elected to accept it. “The IRS has collected huge sums of money in recent months from the settlements it has reached and has amassed quite a war chest. The more it goes after these captives the more money it makes, so it is only logical that it keeps up the pressure,” according to an expert in his article.

VCIA, and others in the industry, has been warning about the impact of these less-than-honest facilities for some time. What the IRS is doing only affects a very small portion of the captive insurance sector, being risk-pooled 831(b) captives. The IRS is not taking any actions against captive insurance companies generally. The IRS is not even pursuing all captive insurance companies that have made the 831(b) election. No Vermont captives have been under scrutiny.

It will be interesting to see how this is reflected in the captive numbers released by the states whose insurance departments made a big deal about mass-licensing so many captives, nearly all of which were 831(b) captives of the risk-pooled varietal. As we have seen before in the captive industry, new captive domiciles will sometimes loosen regulatory standards in order to drive new captive formations – and put out press releases attesting to the growth in their states.

As I said in the beginning, no industry likes the headlines about IRS scrutiny. But I am hopeful this will clean up a particularly bad set of apples in ours.

Thank you and I look forward to hearing from you!

Rich Smith
VCIA President