What You Need to Know
- The letter involves a long-running battle between the IRS and micro captive users.
- The micro captives themselves generally said they were insuring the owners against property or casualty risks.
- Some of the micro captives bought corporate-owned life insurance or other life products.
The Internal Revenue Service is trying to make life even worse for the owners of what it classifies as abusive micro captive insurance arrangements.
In a recent ruling, the agency said that owners of abusive micro captives owe the IRS adjustment payments linked to their failures to withhold taxes on the cash used to make the micro captive premium payments.
A captive insurance company is an arrangement that a company, individual or group sets up to insure the owner, or owners, against risk.
The IRS already has refused to let the micro captive owners take deductions for the micro captive premium payments.
The affected micro captive owners must pay withholding tax adjustments on top of paying the IRS back for the amounts owed due to premium deduction denials, the agency states.
The withholding tax adjustment is equal to 30% of the total payments made to the captive insurer involved in the enforcement action in all tax years at issue, according to the IRS.
The agency’s office of associate chief counsel, international, recently gave that interpretation in a letter ruling sent to James Hartford and Doreen Susi, two IRS officials involved with micro captive regulation.
A letter ruling is supposed to help a taxpayer or tax advisor understand how the IRS sees an issue. In theory, a letter ruling is not supposed to serve as a precedent. In practice, taxpayers tend to see a letter ruling as a sign of how the IRS might handle a question in the future.
Letter rulings usually are issued without identifying the parties that asked for a ruling. Although the header of the new micro captive letter ruling shows that it’s directed at Hartford and Susi, it does not indicate whether taxpayers or taxpayers’ advisors asked for the ruling.
The IRS does not indicate how many taxpayers might be affected by the withholding tax adjustment ruling.
An example of this practice is a large group medical practice that sets up a captive insurer to insure the doctor owners against medical malpractice risk.
The owner, or owners, typically set up a captive outside the United States, or in a U.S. state that has adopted a special legal framework for overseeing captive insurers.