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IRS to Send 12 Teams Out to Audit Micro Captives

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The Internal Revenue Service says it’s forming 12 audit teams to go after what it sees as “several thousands” abusive micro-captive insurance arrangements.

The new examination teams will be made up of employees from the IRS Large Business and International and Small Business/Self-employed divisions, IRS officials announced Friday.

“These teams will use all available enforcement tools, including summonses, to obtain necessary information,” the IRS said in the announcement. ”Potential civil outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity and imposition of all applicable penalties.”

(Related: IRS Micro Captive Net May Snare Some Life Arrangements)

A “micro captive” is a small insurance company that focuses on serving one taxpayer, or one group of taxpayers.

The IRS has been expressing concerns about micro captives for years, and it put the arrangements on its “Dirty Dozen” problem tax arrangements list for 2014.

The IRS sent out a wave of settlement offers to micro-captive owners this past summer.

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About 80% of the owners accepted the settlement terms, the IRS said in the new audit team announcement. The settlement offer letters required taxpayers to make a “substantial concession of the income tax benefits” previously claimed and pay penalties, the IRS said.

The IRS says that it now has three U.S. Tax Court decisions supporting its view that certain micro-captive arrangements are not eligible for federal tax benefits.

One open question is how many of the audits will involve micro captives with ties to the life insurance sector.

Philip Karter — a shareholder in the Philadelphia office of one of the law offices that advises the micro captive owners, Chamberlain, Hrdlicka, White, Williams & Aughtry — suggested in an interview in November that most of the micro captives getting extra scrutiny from the IRS provide property and casualty coverage, not life coverage. But he suggested that some life insurance planners could be involved, because those planners had recommended that clients put extra micro captive cash in corporate-owned life insurance.

— Read Tax Shelters and Abusive Tax Shelters: What Are They?on ThinkAdvisor.

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