The Internal Revenue Service said Monday it is offering limited settlements as partial relief to certain taxpayers under audit for participating in so-called micro-captive insurance transactions, a structure the IRS says can allow for tax avoidance and evasion.
Micro-captive schemes have been consistently listed on the agency’s “Dirty Dozen” list of tax scams, along with foreign tax evasion schemes involving trusts, and others.
The IRS is offering settlements to certain taxpayers under audit for using these entities in the wake of several wins in U.S. Tax Court cases, it stated in a notice released Monday.
The impacted taxpayers who are eligible for settlement relief from the audit will get letters from the IRS. These taxpayers have had exams ongoing for at least a year.
In such a transaction, the taxpayer or taxable entity sets up through its own direct or indirect ownership its own “captive” insurance company through a contract treated as an insurance contract, and claims deductions as premiums paid.
The captive itself could enter into a risk pooling agreement combining with the risks of other entities, in a reinsurance agreement.
One of the sticking points is identifying the good captives from the bad, and it hinges on what is actual insurance and what is not, a difficult assessment to make in some cases.