I am pleased to inform you of an upcoming live webinar I will be speaking at. I think this program will be of particular interest to you and I would like to personally invite you to attend.
Get Sued by Your Clients and Fined by the IRS, 419 Welfare Benefit Plans, Section 79, Captive Insurance and Abusive Tax Shelters on December 1, 2016
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http://www.lorman.com/live-webinar/399547
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I look forward to having you in attendance and will be prepared to answer your questions and provide you the latest information on this topic.
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However the reporting obligation itself is fairly onerous and applies to the captive itself, its owners, the insured company and, if there is one, the fronting company. All of these may be considered participants. Each participant (potentially three or more for each captive) must file a Form 8886:
with his/her/its 2016 tax return and with the Office of Tax Shelter Analysis for the 2016 tax year if the return is due after January 30, 2017 (and the same for subsequent years until the requirement ceases);
with the Office of Tax Shelter Analysis for the 2016 tax year by January 30, 2017 if the return is due before January 30, 2017; and
with the Office of Tax Shelter Analysis for all applicable prior years by January 30, 2017 (a single filing for all prior years is adequate) even if the taxpayer was no longer in the captive on November 1, 2016 (i.e. participation ceased years earlier and the limitations period has not yet run).
It appears from the Notice that in determining the applicable prior years we basically have to perform a decision flow chart:
was the transaction entered into on or after November 2, 2006? If yes then:
during any of the prior five years did the captive qualify as a transaction of interest? If yes then for each of those qualifying years:
during any of those prior qualifying years was the person a participant? If yes then for each of those years as a participant:
did the statute of limitation run on any of those years for each participant? If yes then:
file the Form 8886 as appropriate only for such years that are still open.
The Form 8886 for all participants must contain a description of the transaction in sufficient detail for the IRS to be able to understand the tax structure, including when and how the taxpayer became aware of the transaction, and the identity of all parties involved. In addition, the Form 8886 for the captive must also include detailed information including, among others, the actuarial basis for the premium, a description of the risks covered, its claims paid history and a description of its investments.
For each year that an entity fails to file a complete Form 8886 or files it late there can be a penalty equal to 75% of the tax reduction, but not less than $10,000 nor more than $50,000. For each year that a natural person fails to file a complete Form 8886 or files it late there can be a penalty equal to 75% of the tax reduction, but not less than $5,000 nor more than $10,000
For those tempted to ignore this filing requirement on the assumption that they might not be found, note that any captive manager or other adviser who advised participation in the captive is also required to submit a detailed list of its clients.
Finally, taxpayers need to check if their State has a similar filing requirement.
WHAT DOES ALL THIS MEAN?
Identification as a transaction of interest does not necessarily mean that the transaction is a tax abuse. While the ultimate determination of the IRS cannot be predicted it is possible, based on other information in the Notice, they might be looking for some combination of additional factors, including implausible risks, mismatch of coverage to actual risks, overpriced coverage and failure to interact in the manner expected of an insurance company.
SHOULD I STAY OR SHOULD I GO?
There is nothing specifically in this Notice that should force any captive insurance company into immediate dissolution. Doing so will not remove the Form 8886 filing obligation for 2016 and prior years, which is already carved in stone. Staying or leaving in the short run, to put it colloquially, should not increase or reduce one’s risks. Yet there may be reasons to keep the structure intact or to terminate it that differ on a case by case basis