BHBM Tax Law Alert 9/20/2019

In the recently issued IR 2019-157, the IRS announced that it is mailing a time-limited settlement offer to certain taxpayers under audit who participated in abusive micro-captive insurance transactions.

Having consistently disallowed the tax benefits claimed by taxpayers in abusive micro-captive structures, the IRS’s announcement comes after the Tax Court sustained the IRS’s disallowance of the claimed tax benefits in three consecutive cases, including the cases of Avrahami, et al v. Commissioner, 149 TC No. 17 and Syzygy Insur. Co., Inc. v. Commissioner, T.C. Memo 2019-34.

Only those taxpayers who receive a settlement offer by letter from the IRS are eligible for this resolution. Although the initiative is currently limited to taxpayers with at least one open year under exam and taxpayers who have unresolved years under the jurisdiction of the IRS Appeals, the IRS is continuing to assess whether the settlement offer should be expanded to other taxpayers.

Unless the taxpayer can demonstrate good faith, reasonable reliance, the settlement requires substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties.

If a taxpayer who receives a letter under this settlement initiative declines the offer, the IRS will continue to audit the taxpayer under the IRS’s normal procedures, which may result in the full disallowance of captive insurance deductions, inclusion of income by the captive and imposition of all applicable penalties. Moreover, a taxpayer who declines this offer will not be eligible for any potential future settlement initiatives.

The IRS notes that, although the taxpayers who decline this offer will have full appeal rights, the IRS Independent Office of Appeals believes the terms of this resolution initiative generally reflect the hazards of litigation faced by taxpayers, so taxpayers should not expect to receive better terms in appeals than those offered under this initiative.

The IRS will continue to disallow the tax benefits claimed in micro-captive insurance transactions and defend its position in court. Further, the IRS plans to continue opening additional exams in this area as part of ongoing work to combat abusive transactions.