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  • Gary Mauney

Micro-Captive Insurance named as potentially Abusive Tax Shelter in new GAO Report

Gary Mauney, of Mauney PLLC, one of the most experienced abusive tax shelter litigators in the United States, alerts participators in Micro-Captives to the issues raised by the GAO report.

The GAO reports that offshore micro-captive insurance products, which are made by small insurance companies owned by the businesses they insure, may be considered an abusive tax shelter by the IRS if a corporate taxpayer improperly claims deductions for payments made to a micro-captive for federal tax purposes. Courts have applied various tests and well-recognized court doctrines to determine whether these deductions can be claimed. For example, one consideration is whether the insurance legitimately distributes risk across participating entities. Offshore variable life insurance products, which are insurance policies with investment components over which the insured has certain control, may be considered abusive if the individual taxpayer fails to meet IRS reporting requirements or pay appropriate federal income taxes. Federal regulations require that taxpayers with certain foreign life insurance accounts report this information to IRS and the Financial Crimes Enforcement Network.


While taxpayers can hold offshore insurance for a number of legitimate reasons, the IRS has identified instances where taxpayers have used offshore insurance products to improperly reduce their tax liabilities. These abusive offshore insurance tax schemes can involve sophisticated tax shelters, devised and marketed to taxpayers by accountants, estate planners, and attorneys. These shelters may also be constructed or recommended by professionals that have established relationships with taxpayers. IRS officials warn that when insurance is held offshore, the IRS may expend more resources in order to identify those particular abusive insurance tax schemes and take enforcement action.


The IRS has also determined that various forms of offshore life insurance arrangements have the potential for tax abuse.The IRS reported to the GAO that offshore variable life insurance products have been used to conceal assets from the U.S. government, including undeclared assets that are susceptible to discovery during United States’ investigations of foreign banks. Further, the IRS is aware that some taxpayers closely control how their premiums are invested and that some of those taxpayers are directing premium funds toward illiquid assets they currently own in an attempt to convert taxable income to tax exempt income that is eventually passed on to their beneficiaries tax-free.


On November 1, 2016 the IRS released Notice 2016-16 (the "Notice"), which alerted taxpayers that certain forms of "Micro-Captive" transactions have been identified as "Transactions of Interest." As a result of the Notice, it behooves taxpayers to evaluate whether their Micro-Captives meet the criteria set forth in the Notice. Taxpayers who participated in a transaction covered by the Notice are now subject to reporting requirements under Reg. § 1.6011-4(d). In addition, the taxpayers advisors, sometimes called promoters, may be subject to disclosure and list maintenance requirements under IRC sections 6111 and 6112. In other words, if you are in a Micro-Captive covered by the Notice, the IRS is highly likely to learn this, and the penalties for non-compliance with the IRS's reporting, disclosure, and list-keeping requirements could expose you to IRS penalties, such as the dreaded accuracy-related penalty under IRC sections 6662 or 6662A.

Between November 1, 2016, and December 31, 2019, IRS processed disclosures on thousands of Micro-Captive insurance transactions. The GAO reports that the majority of Micro-Captive cases examined by the IRS have been determined to be abusive. The GAO reports that as the result of various IRS enforcement actions, including a 2016 enforcement campaign, the IRS offered settlements to 156 taxpayers who participated in abusive Micro-Captive transactions. Of those taxpayers, 76 percent elected to accept the settlement terms as of June 2020. Since 2017, it is notable that the IRS has won three Micro-Captive cases before the Tax Court. In each of these cases, the Tax Court supported the IRS’s increased enforcement actions against abusive Micro-Captive insurance products. At issue in each of the Tax Court cases was whether the Micro-Captive or related businesses could claim various deductions and tax benefits.


If you are a participant in a Micro-Captive Insurance Company under fire by the IRS, you may have a malpractice or fraud case against the accountants, attorneys, bankers, actuaries, and other professionals that promoted this form of tax shelter to you. Do not be fooled by promoters' blanket claims that a civil action against them cannot be successfully sustained while you are under IRS audit or are pursuing a Tax Court action. You may be able to recover against promoters for damages such fees paid, structural expenses, tax penalties, and other out-of-pockets. Time is not on your side, since state statutes of limitation may already be running against you. Moreover, the ability to secure valuable evidence to support your claims may become increasingly difficult to obtain as time elapses.


If you have reason to believe that you were sold a potentially abusive tax shelter in the form of a Micro-Captive Insurance Company, contact tax shelter attorney Gary Mauney of Mauney PLLC for a confidential review of your situation. Email Mauney PLLC at or telephone us at 704/945-7185.


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