Menu

IRS Targets Captive Insurance Companies Owned by Closely Held and Middle Market Companies

Tax   |   July 9, 2015
Download   
Share Page

Magnifying Glass 

In February 2015, the IRS added certain small or “micro” captive insurance companies to its “Dirty Dozen” list of abusive tax scams for the 2015 filing season.

In response to what it sees as an abuse involving a legitimate tax structure, the IRS commenced promoter audits of several captive manager/providers under Internal Revenue Code (IRC) Section 6700, the section that permits the IRS to impose a potentially confiscatory penalty on anyone who organizes and sells what IRS determines is an abusive tax avoidance transaction.

In connection with these audits, the IRS systematically requests client lists and client information maintained by captive insurance managers. It has served document and information requests on many of those clients. The IRS is also auditing insurance risk pools operated by many captive managers for their client operating companies.

The potential risk to a company whose captive insurance company is disqualified, either through disqualification of the captive or of the risk pool in which many of its premiums are invested, is substantial. The operating company can be subject to reversal of tax deductions taken for premiums paid along with penalties and interest.

If your company maintains a captive insurance company qualified under IRC Section 831(b) (up to $1.2 million per year premium), you should determine whether any of your captive insurance products are placed with a captive manager currently involved in a promoter audit. You should also notify your tax return preparer.

If you are served with an IRS information document request, summons, or subpoena, it is important to retain knowledgeable tax counsel prior to any response. Your captive insurance manager will have its own concerns, which limit the guidance it can provide.


©2020 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.