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!
CAPTIVE INSURANCE 831B AND THE IRS, 6945 views, 143 likes
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Published on December 16, 2016
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Lance Wallach
Lance Wallach
Business Owner at National Offices of Lance Wallach
For years I have been warning that the IRS will audit small captives. Last year they were named in the IRS dirty dozen. In Nov of this year the IRS warned that they had to be disclosed by filing under IRS 6707A. Do not let anyone related to the captive do that 8886 filing for you. When the 8886 is done wrong, as most people do, you have lied to the IRS. It also brings a quick audit. Some small captives are referring members to people they have a relationship with to do the 8886 forms. That usually brings an audit. In addition who do you think the person that does the forms really represents, you or the captive. Use a CPA with years of successful filing experience. I recomend using a CPA with years of experience working as an IRS agent. I have received hundreds of phone calls from business owners after they have made the mistake of using the wong person to file, not just captives but 419 and section 79 scams.
Large U.S. companies have been forming captive insurance companies (wholly owned insurance subsidiaries) since the 1950s. In general, such large captives are formed for one of three main reasons. First, some companies are unable to obtain necessary insurance coverage. For example, certain nuclear power companies formed a captive named Nuclear Electric Insurance Limited, because they could find no other insurance coverage. Second, some companies seek to obtain cheaper insurance. For example, the trucking market is currently “hardening” (premiums are increasing), leading to trucking companies forming captives. Third, some companies seek to gain more control over their current insurance program.
The insurance code offers a small insurance company a strategic advantage: Internal Revenue Code (IRC) § 831(b) allows insurance companies with less than $1.2 million in premiums to be taxed on their investment earnings rather than on their gross income. As a simple example, suppose a small insurance company had $500,000 in income but earned 5 percent on its total portfolio earning $25,000 for the year. The company would use the $25,000 figure as their gross income figure for the year.
A captive can also be formed offshore and still be deemed a U.S. captive, provided it makes an IRC § 953(d) election agreeing to be taxed as a domestic company. For many large captives, forming offshore may provide a great deal of flexibility not found onshore. However, it should be noted that the Internal Revenue Service (IRS) is currently spending a great deal of time focused on offshore tax enforcement. Recently, the IRS refused to issue a positive private letter ruling to a number of foreign captives seeking 831(b) status, which may be an indication of tougher IRS scrutiny in this area. Thus, while a compliant captive should ultimately have nothing to fear from operating internationally, there is at least some chance that doing so may result in some additional compliance costs if it gets caught up in
CAPTIVE INSURANCE 831B AND THE IRS, 6945 views, 143 likes
ReplyDeleteEdit article
Published on December 16, 2016
LikedUnlikeCAPTIVE INSURANCE 831B AND THE IRS, 6945 views, 143 likes1Comment0ShareShare CAPTIVE INSURANCE 831B AND THE IRS, 6945 views, 143 likes0
Lance Wallach
Lance Wallach
Business Owner at National Offices of Lance Wallach
For years I have been warning that the IRS will audit small captives. Last year they were named in the IRS dirty dozen. In Nov of this year the IRS warned that they had to be disclosed by filing under IRS 6707A. Do not let anyone related to the captive do that 8886 filing for you. When the 8886 is done wrong, as most people do, you have lied to the IRS. It also brings a quick audit. Some small captives are referring members to people they have a
The lawsuit alleges both companies knew the plans were flawed and that the companies promised tax write-offs that the IRS later didn’t approve. The lawsuit further alleges that by offering 95 percent commissions, FSL encouraged its employees to sell poor plans.
ReplyDelete“The Plaintiffs are small businesses without the internal resources to make the many intricate decisions needed to establish, administer and invest in employee benefit plans on their own,” according to the complaint. Therefore, they must “place themselves in the hands of experts in the field.”
According to the release, FSL told clients they could be trusted because of their “Midwestern values.”
As an employee benefits company, CJA packaged the programs specifically for small businesses. According to the complaint, the “company repeatedly touted that the plan permits employers to design a retirement plan while enjoying large immediate income tax deductions.”
But CJA never told small business owners about the 95-percent fees and commissions, according to the complaint, nor did the company provide other pension options.
“CJA promises its clients that it will take the worry out of retirement planning,” according to the complaint. “The Plaintiffs relied to their detriment on CJA’s superior knowledge and skill in choosing the Plans’ investments, their structure and their ongoing administration.”
Neither CJA or Fidelity were available for immediate comment.