Earlier this week, the IRS announced that certain taxpayers currently under audit related to their micro-captive insurance arrangements will receive the opportunity to accept a predetermined settlement offer. The offer extended by the IRS highlights the following terms, among others:
- Ninety percent (90%) of deductions for micro-captive insurance premiums claimed will be disallowed for all open tax years.
- Any captive-related expenses claimed on the taxpayer’s return, including fees paid to managers for formation or maintenance of the captive, will be disallowed in full.
- The captive will not be required to recognize taxable income for premiums received.
- To accept the settlement, the captive insurance entity: (i) must already be liquidated; (ii) will be required to liquidate; or (iii) will recognize income for a deemed qualified dividend.
- An accuracy related penalty may also be applied at a reduced rate of 10%.
- If the taxpayer has not previously participated in any other reportable transaction and signs a declaration to that effect, the penalty will be reduced by 5%.
- Further, if the taxpayer relied on advice from an independent tax professional and such advisor signs a declaration provided by the IRS indicating their advisory role, the penalty will be reduced by 5%.
Taxpayers who are under audit and are provided this opportunity should take the time to evaluate this offer with respect to their own facts and circumstances. Although the loss of 90% of the benefit may not seem like an attractive settlement option, for a taxpayer with “bad facts” the proposed terms may be generous enough to consider a settlement. The IRS has touted several recent victories with respect to micro-captive transactions, but these cases have illustrated bad taxpayer fact patterns that were strongly in the IRS’s favor. By litigating these more favorable cases first, the IRS hopes to discourage taxpayers with stronger fact patterns from continuing their defense of their positions. However, many of the several hundred pending cases in Tax Court have more taxpayer favorable facts and circumstances and are likely to create a more favorable precedent.
These time-limited (up to 30 days, or 60 days where an extension is granted) settlement offers have been or will be mailed to certain taxpayers who are either under current audit or under the jurisdiction of the IRS Office of Appeals with respect to their interest in these micro-captive transactions. For those taxpayers already engaged in the process with U.S. Tax Court, such a settlement will not be made available.
Members of the Duggan Bertsch team are available to discuss their client’s receipt of such an IRS settlement offer or, if one has not yet been received, strategies and considerations to address any issues related to their captive insurance structure.
If the above article was of interest to you, please consider reading the following article pertaining to Illinois’ 2019 Tax Amnesty Program. CLICK HERE to read the complete article!