Micro-captives back on IRS’s ‘dirty dozen’ list of US tax scams

Micro-captives in the US have once again appeared on the Internal Revenue Service’s (IRS) ‘dirty dozen’ list of tax scams. The IRS warned taxpayers to watch out for schemes peddled by tax promoters, including syndicated conservation easements, abusive micro-captive insurance arrangements and other abusive arrangements.

Last year, micro-captives, a type of 831(b) captive insurance company, were not on the list for the first time in five years. But this year they are back on, and while they bear little resemblance to the captive insurance market for large corporations, the continued focus of the IRS on these captives does not help the wider captive sector in its dealings with regulators and tax authorities globally.

The IRS warned people “to be on the lookout for promoters who peddle false hopes of large tax deductions from abusive arrangements”, adding: “These ‘deals’ are generally marketed by unscrupulous promoters who make false claims about their legitimacy and charge high fees to boot. These promoters frequently devise new ways to cheat the system and market them aggressively. Some taxpayers play the audit lottery, hoping they don’t get noticed.”

The IRS recently created the Office of Promoter Investigations to fight the evolving variety of these abusive arrangements, and to focus on the participants and promoters of abusive tax-avoidance transactions.

According to the IRS: “In abusive micro-captive structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of insurance. For example, coverages may ‘insure’ implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages. But the ‘premiums’ paid under these arrangements are often excessive and used to skirt tax law.”

The IRS said it has recently stepped up enforcement against a variation using potentially abusive offshore captive insurance companies domiciled in Puerto Rico and elsewhere.

The IRS said it continues to pursue actions against promoters of these schemes as well as the taxpayers who participate in them. “We are stepping up our enforcement against abusive arrangements,” said IRS commissioner Chuck Rettig. “Don’t be lulled into these shady deals. The IRS recommends that anyone who participated in one of these abusive arrangements should consult independent counsel about coming into compliance.”

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