The Captive Insurance Companies Association ("CICA"), a trade association representing the captive insurance industry, has issued a statement on section 831(b) companies with cautionary language: The traditional captive insurance company industry and CICA are extremely concerned about the misuse of small captives utilizing the IRC 831(b) election and the attendant publicity about "captives" being a tax avoidance device. Although there is nothing wrong with the utilization of the 831(b) election when a small captive insurance company is truly engaged in insuring the risk of its parent company/owner(s), the traditional captive insurance industry strongly opposes the utilization of small 831(b) captives primarily for tax sheltering purposes. In simple language, do 831(b)s right or don't do them at all!
A new law governing microcaptives is increasing the risk that the Internal Revenue Service will order an audit of the captive's parent company or the captive manager overseeing the company-owned insurer.
ReplyDeleteThe use of the microcaptives, or those electing to be taxed under Section 831(b) of the U.S. Tax Code, has increased during the past five years, experts said.
The Protecting America from Tax Hikes Act of 2015, which was enacted last year, changed the limits and the rules governing those microcaptives.
Under the new law effective in 2017, 831(b) captives can avoid federal taxes on up to $2.2 million in annual premium income, which is up from the current limit of $1.2 million.
The higher limit is an opportunity for captive owners to place more risks in their captives, such as cyber; earthquake, wind and flood; pollution liability and cleanup; property mold; and difference in limits/difference in conditions risks, experts said during the Captive Insurance Companies Association's 2016 International Conference in Scottsdale, Arizona, earlier this month.
While the new law increases the premium income that is exempt from taxation, it also imposes stricter rules on the ownership structures of 831(b) captives, which are often used by family-run companies, to be eligible for that exemption.
“The IRS scrutinizes small captives very closely,” said Daniel Kusaila, a Hartford, Connecticut-based tax partner at law firm Crowe Horwath L.L.P.
Captive parents that try to “massage” their premium income “need to be very careful because they are putting their tax election at risk” as well as potentially putting “the captive in jeopardy,” he said.
Small captives must file under IRS 6707A or be fined and audited, 5842 views, 139 likes
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The formation of a Captive Insurance Company (CIC) has become a common practice among both the Fortune 1000 and small and mid-sized companies, offering businesses an alternative to appropriately manage risk while at the same time taking into account future tax and business planning. With this growth of CICs, the IRS has begun tax shelter promoter examinations into this area. The IRS has publicly stated concern and has initiated audits of hundreds of taxpayers with captive insurance companies. For those taxpayers in examination, the penalties and interest can be significant. The IRS is also examining practitioners that are assisting CICs with compliance.
ReplyDeleteFor those seeking to protect their CIC, don’t wait until the IRS starts an examination to ensure you are up to code.
captive insurance problems
ReplyDeletePublished on Published onNovember 6, 2017
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