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!
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ReplyDeletePublished on November 28, 2016
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Stacey Arenas
Stacey Arenas
Assistant Managing Director, Marketing Manager at Vebaplan LLC
IRS Requires Disclosure By January 30, 2017 Of Certain 831(b) Captive Insurance Arrangements
The IRS has been receiving reports of certain small captive insurance arrangements that are being offered to taxpayers with little or no regard with respect to the insurance provided, and instead, almost entirely focused on the large tax savings. The tax savings in the questionable arrangements can be significant including a 100% business deduction for a policy written in December for which over 80% of the premiums are returned tax-free at the end of the next year.
IRS Utilizes the Disclosure Tool of a “Transaction of Interest” and Chooses an Overly Inclusive Sample
The IRS is currently focused on certain small captive insurance arrangements that take advantage of I.R.C. Section 831(b) and the ability of the captive to exclude from income a certain amount of premiums earned each year. The IRS identified these “microcaptives” as “transactions of interest” in Notice 2016-66.
A transaction of interest designation imposes an obligation on taxpayers and material advisors to formally disclose the details of their insurance transactions to the IRS or otherwise face large potential penalties. For prior tax years, the disclosure must be made by January 30, 2017. To review the IRS notice, which is summarized below, click here: https://www.irs.gov/pub/irs-drop/n-16-66.pdf.
This current disclosure requirement tool of a transaction of interest is a seldom used information gathering tool employed by the IRS to survey a large grouping of transactions to identify which arrangements fall within the transaction of interest scope should be listed and/or examined.
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ReplyDeletePublished on September 19, 2016
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