Did you Participate in a 419 or 412i Benefit Plan?
Lance Wallach is the nation's foremost expert on 419 plans, 412i plans, listed transactions, reportable transactions, Section 79 plans, captive Insurance plans
If you are in a small micro captive 831b plan you have a problem. I have been writing about this for years, and have received hundreds of calls about audits.
For three consecutive years, the Service has targeted micro-captive insurance arrangements as an abusive tax shelter. Micro captives are discussed in detail by the Service as an abusive tax shelter and have been listed as a “transaction of interest” since 2016. Being listed as a transaction of interest means that the Service and the Treasury Department have found that it has the potential for tax avoidance or felonious tax evasion, but lack sufficient information to determine whether to list the transaction as a “tax avoidance transaction.”
As a “transaction of interest,” micro-captive arrangements must report to the Service using IRS Form 8886. The report must include: the insurance coverage provided, identification of the actuaries and underwriters, an explanation of how premiums were determined, a description of claims, and a description of the captive’s assets. The initial report for transactions was due May 1, 2017. Failing to report the transaction incurs a penalty equal to 75% of the reduction in the tax, subject to a minimum penalty of $5,000 for individuals and $10,000 for other taxpayers and a maximum of $10,000 for individuals and $50,000 for other taxpayers.
Because micro-captive insurance arrangements are authorized by the tax code under section 831(b), they are not per seabusive. Problems developed with captives failing to operate in good faith, jeopardizing recognition as a bona fide captive insurance company. These problems were exacerbated by unscrupulous promoters promising tantalizing tax benefits. These promoters implemented slipshod insurance structures to reverse-engineer the promised tax benefits.
Widespread uncertainty exists as to the how the Service’s challenges to micro-captives will be resolved. There are currently a host of tax cases percolating through the courts which will ultimately provide guidance. Notably, the Service recently obtained a victory in the case of Avrahami v. Commissioner, a case with particularly bad facts.
If your company currently maintains a micro-captive arrangement, it is a good time to confirm that you have complied with the reporting requirements. Likewise, it is also a good time to obtain professional review of the arrangement to make sure that best practices have been followed.
Micro captive 831b audits.
ReplyDeletePublished on Published onFebruary 16, 2018
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Lance Wallach
Lance Wallach
Abusive tax shelters, 419, section 79, 412i micro captive insurance, VEBA, expert witness, author, speaker
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If you are in a small micro captive 831b plan you have a problem. I have been writing about this for years, and have received hundreds of calls about audits.
For three consecutive years, the Service has targeted micro-captive insurance arrangements as an abusive tax shelter. Micro captives are discussed in detail by the Service as an abusive tax shelter and have been listed as a “transaction of interest” since 2016. Being listed as a transaction of interest means that the Service and the Treasury Department have found that it has the potential for tax avoidance or felonious tax evasion, but lack sufficient information to determine whether to list the transaction as a “tax avoidance transaction.”
As a “transaction of interest,” micro-captive arrangements must report to the Service using IRS Form 8886. The report must include: the insurance coverage provided, identification of the actuaries and underwriters, an explanation of how premiums were determined, a description of claims, and a description of the captive’s assets. The initial report for transactions was due May 1, 2017. Failing to report the transaction incurs a penalty equal to 75% of the reduction in the tax, subject to a minimum penalty of $5,000 for individuals and $10,000 for other taxpayers and a maximum of $10,000 for individuals and $50,000 for other taxpayers.
Because micro-captive insurance arrangements are authorized by the tax code under section 831(b), they are not per seabusive. Problems developed with captives failing to operate in good faith, jeopardizing recognition as a bona fide captive insurance company. These problems were exacerbated by unscrupulous promoters promising tantalizing tax benefits. These promoters implemented slipshod insurance structures to reverse-engineer the promised tax benefits.
Widespread uncertainty exists as to the how the Service’s challenges to micro-captives will be resolved. There are currently a host of tax cases percolating through the courts which will ultimately provide guidance. Notably, the Service recently obtained a victory in the case of Avrahami v. Commissioner, a case with particularly bad facts.
If your company currently maintains a micro-captive arrangement, it is a good time to confirm that you have complied with the reporting requirements. Likewise, it is also a good time to obtain professional review of the arrangement to make sure that best practices have been followed.