The US Treasury and the Internal Revenue Service are seeking feedback on which 831(b) arrangements should be identified specifically as a tax avoidance transaction.
In Notice 2016-66, which was highlighted by prominent insurance attorney Jay Adkisson, the IRS and the Treasury outline the types of ‘micro-captive transactions’ that are causing them concern and ask for information as to which they should be focusing on as they attempt to crack down on tax avoidance.
The IRS and the Treasury suggested that ‘micro-captive transactions’ are being used by promoters to shield legitimately taxable income. The Internal Revenue Code’s 831(b) can be elected by small insurance companies with premiums of less than $1.2 million.
The notice said: “The manner in which [some of these] contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices.”
The IRS and the Treasury admitted they “lack sufficient information to identify which 831(b) arrangements should be identified specifically as a tax avoidance transaction and may lack sufficient information to define the characteristics that distinguish the tax avoidance transactions from other 831(b) related-party transactions”.
The notice identified certain 831(b) arrangements and similar transactions as ‘transactions of interest’ for the purposes of the income tax regulations and tax code. It also alerted those involved in transactions of this nature to certain responsibilities and penalties that may arise from their involvement.
Earlier this year, the IRS listed micro captives on its ‘Dirty Dozen’ tax scams list for the second year running.
The ‘Dirty Dozen’ list calls out tax scams that the IRS will be targeting in the coming year.
When the list was released, IRS commissioner John Koskinen stated: "Taxpayers should steer clear of unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed. These schemes can end up costing taxpayers more in back taxes, penalties and interest than they saved in the first place.”
