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The IRS Moves to Resolve Abusive Micro-Captive Transactions

The IRS has recently announced that it would be accepting time-limited settlement offers to specific taxpayers who were under audit for participating in abusive micro-captive transactions. Nearly 80% of taxpayers who received offer letters chose to accept their proposed settlement terms. The IRS will establish 12 new examination teams who will open new audits relating to thousands of U.S. taxpayers on this issue over the coming months.

Many view the large-scale private settlement acceptance as a sign of the government’s success in working to stop the abuse. Taxpayers who have accepted the terms offered to them by the IRS believe that they are doing the right thing. They are now complying with their tax obligations while putting the abusive transactions behind them. Since the IRS wants to stop abusive schemes as a top priority, the high acceptance rate is great news.

Abusive Micro-Captives – A Long-Term Threat

Micro-captive abusive transactions have posed a major threat to the administration of tax and have been causing the IRS serious concerns for several years. These transactions have been on the IRS’s tax scam radar since 2014. The IRS and Treasury Department issued Notice 2016-66 two years after that date. This identified specific micro-captives as having the potential for evasion of tax and tax avoidance.

Pursuing Abusive Transactions

The latest settlement offers have come after three decisions made by the U.S. Tax Court. These confirmed that specific micro-captive arrangements were not eligible to receive federal tax benefits. The settlement terms required a substantial concession of income tax benefits that taxpayers had claimed. There were appropriate penalties applied as well.

In addition to the recent settlement offers, the IRS commits itself to vigorously pursuing anyone involved in these abusive transactions and will increase enforcement activity significantly. The IRS will be deploying extra resources, including 12 newly formed examination teams, for this purpose. These teams comprise employees who come from the IRS Small Business/Self-Employed and Large Business and International divisions. The new teams will be working hard to address abusive transactions while also opening additional examinations.

The teams will put all IRS enforcement options into use. These include the use of summonses to get the necessary information.

The Possible Outcome of Newly Opened Examinations

Examinations that affect the micro-captive transactions of thousands of taxpayers will open over the coming weeks. The possible civil outcomes include the full disallowance of the claimed insurance deductions and the inclusion of the captive entity’s income. It may also include the imposition of applicable penalties.

The IRS has reminded advisors and taxpayers, therefore, that disclosure of any participation in micro- captive transactions is necessary. Disclosure is a requirement under the terms of Notice 2016-66 of the IRS Office of Tax Shelter Analysis. Any failure to disclose this information may result in large civil penalties. Any taxpayer involved in abusive micro-captive transactions must consult immediately with a competent, independent tax advisor. This will ensure proper treatment of both the future and past tax years.

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

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