IRS offers new stricter settlement for micro-captive insurance schemes; offer letters being mailed to groups under audit


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IR-2020-241, October 22, 2020

WASHINGTON — The Internal Revenue Service announced today a second time-limited settlement initiative for certain taxpayers under audit who participated in abusive micro-captive insurance transactions.

In the coming days, the IRS will begin sending settlement offers with terms that are stricter than the IRS's first time-limited initiative started last year. This announcement occurs after the IRS recently deployed its 12 newly formed micro-captive examination teams to substantially increase the examinations of abusive micro-captive insurance transactions.

The IRS has decided to offer to resolve certain cases by requiring substantial concession of the income tax benefits claimed by the taxpayer together with penalties that can be partly mitigated if the taxpayer can demonstrate good faith, reasonable reliance on an independent, competent tax advisor and if the taxpayer can demonstrate it did not participate in any other reportable transactions.

"The IRS maintains a relentless agencywide commitment to combat abusive transactions," said IRS Large Business & International Commissioner Douglas O'Donnell. "Our offer terms are only getting stricter; and taxpayers would be well advised to consult with an objective, competent advisor with the aim of getting out now and putting this behind them."

This settlement initiative is currently limited to taxpayers with at least one open year under exam. Taxpayers who also have unresolved years under the jurisdiction of the IRS Independent Office of Appeals may also be eligible, but those with tax years involving micro-captive transactions docketed in Tax Court under Counsel's jurisdiction, in general, are not eligible. Taxpayers who do not receive an offer letter are not eligible for this settlement.

Because the terms of this second settlement initiative reflect the IRS's current settlement position, certain taxpayers who received but rejected an offer under the IRS first time-limited initiative may receive an offer under this second time-limited settlement initiative, but under the new, stricter terms.

Taxpayers who receive offer letters under this settlement initiative, but who opt not to participate, will continue to be audited by the IRS under its normal procedures. Potential outcomes include, but are not limited to, full disallowance of captive insurance deductions, inclusion of income by the captive, withholding tax related to any foreign captives, and imposition of all applicable penalties.

Although taxpayers who decline to participate in the settlement will have full Appeals rights, the IRS Independent Office of Appeals is aware of this settlement initiative. Given the current state of the law, taxpayers should not anticipate receiving better terms in Appeals than those offered under this initiative.

In 2016, the Department of Treasury and IRS issued Notice 2016-66, which identified certain micro-captive transactions as having the potential for tax avoidance and evasion.