CAPTIVE EXPERTS LLC Turnkey Services About Captives Risk Management Captive Taxation More Info Loss & Claim Report Form IRS 831(b) Captive Tax Audit Concerns By Tom CifelliSeptember 12, 2014Captive Formation and Management, Captive TaxationNo Comments 0 0 0 0 September 12, 2014 by Tom Cifelli, Managing Director CAPTIVE TAX AUDIT CONCERNS If you engage a captive manager with experience you should not be concerned about tax or regulatory audits other than the extra time and expense they might incur to defend positions taken. The IRS and the industry have established pretty clear guidance on what is required for a captive program to be created for legitimate business purposes and what a solid design and management program looks like. The increased attention by the IRS in auditing 831(b) electing captives and even doing some promoter audits is a good thing; it will force all firms to improve practice standards and others to get out of the industry where they lack requisite skills and experience to properly design, form and manage excellent customized captive risk management solutions. There most certainly are promoters pushing tax shelter attributes of captives and buying life insurance with pre-tax captive dollars who are not focused on helping clients improve risk management. These promoters are hurting the captive industry and may be found in violation of tax shelter promotion restrictions. Some captive managers who are legitimately trying to help clients improve risk managers may be found to have defectively designed programs for a variety of reasons ranging from poor underwriting to defective risk pool structures and practices. The IRS audit activity increase in recent years is not isolated to captives. Click here for a law firm release advising clients the IRS tax audit activity has been increasing across many areas under President Obama’s administration. The IRS audit of captives is certainly nothing new; from 1970s until 2001, the IRS challenged every captive program. It was only due to its many defeats in court that in 2001 it abandoned its economic family doctrine challenge to captives and adopted the seminal 2002 revenue rulings that underlie the industries accelerated growth in recent years. Properly designed and managed 831(b) electing captives should still be fine, and should expect no audit adjustments required after an IRS review. Some may be required to defend positions taken in tax court, as the IRS continues taking some unreasonable positions despite acknowledging the importance of captives to an increasing number of US businesse
CAPTIVE EXPERTS LLC Turnkey Services About Captives Risk Management Captive Taxation More Info Loss & Claim Report Form IRS 831(b) Captive Tax Audit Concerns By Tom CifelliSeptember 12, 2014Captive Formation and Management, Captive TaxationNo Comments 0 0 0 0 September 12, 2014 by Tom Cifelli, Managing Director CAPTIVE TAX AUDIT CONCERNS If you engage a captive manager with experience you should not be concerned about tax or regulatory audits other than the extra time and expense they might incur to defend positions taken. The IRS and the industry have established pretty clear guidance on what is required for a captive program to be created for legitimate business purposes and what a solid design and management program looks like. The increased attention by the IRS in auditing 831(b) electing captives and even doing some promoter audits is a good thing; it will force all firms to improve practice standards and others to get out of the industry where they lack requisite skills and experience to properly design, form and manage excellent customized captive risk management solutions. There most certainly are promoters pushing tax shelter attributes of captives and buying life insurance with pre-tax captive dollars who are not focused on helping clients improve risk management. These promoters are hurting the captive industry and may be found in violation of tax shelter promotion restrictions. Some captive managers who are legitimately trying to help clients improve risk managers may be found to have defectively designed programs for a variety of reasons ranging from poor underwriting to defective risk pool structures and practices. The IRS audit activity increase in recent years is not isolated to captives. Click here for a law firm release advising clients the IRS tax audit activity has been increasing across many areas under President Obama’s administration. The IRS audit of captives is certainly nothing new; from 1970s until 2001, the IRS challenged every captive program. It was only due to its many defeats in court that in 2001 it abandoned its economic family doctrine challenge to captives and adopted the seminal 2002 revenue rulings that underlie the industries accelerated growth in recent years. Properly designed and managed 831(b) electing captives should still be fine, and should expect no audit adjustments required after an IRS review. Some may be required to defend positions taken in tax court, as the IRS continues taking some unreasonable positions despite acknowledging the importance of captives to an increasing number of US businesse
On February 3, 2015, the Internal Revenue Service issued IR 2015-19, which added certain micro captive insurance companies to the IRS “Dirty Dozen” list. The IRS publishes the Dirty Dozen list to inform the public on what the Service will be focusing on and to warn tax return preparers about these same areas.
While acknowledging that these micro captive insurance companies may be legitimate, the IRS then states that many of these companies are being created and operated for tax versus business reasons. As we represent a wide array of taxpayers in the captive insurance area, let’s take a moment to outline what the IRS is looking at and what we know about the large number of examinations now underway.
How Micro Captives Work
As the IRS admits, Micro Captive Insurance Companies (CICs) are permitted under the tax law. CICs insure the risks of related smaller businesses, and in general, captive managers assist these businesses in forming and running the CIC. Most often the captive manager also will operate a risk pool in which the CIC participates, as do many other unrelated CICs.
The IRS however has become increasingly concerned with how captive managers market CICs, how risk pools operate and how a small business runs its captive.
The Risks of Non-Compliance
The risk is large if the IRS knocks on the door of a captive owner. If the IRS refuses to treat the CIC as an insurance company, there is a reversal of all deductions for insurance premiums for each year they are paid to the captive (that can be up to $1.2 million per year in disallowed premiums). In addition, the IRS will add penalties (often another 20% of the total) as well as interest. The IRS is also considering the use of a new economic substance penalty (increasing the accuracy penalty from 20% to 40%). As you can see, this can be devastating to a small business and its owners.
What We Know Today
Here is what we know as of now regarding the IRS’s recent enforcement activities for CICs
First, we know that there are several captive managers under investigation. The focus appears to be on how the CICs are being marketed and how the risk pool is designed and operated
On February 3, 2015, the Internal Revenue Service issued IR 2015-19, which added certain micro captive insurance companies to the IRS “Dirty Dozen” list. The IRS publishes the Dirty Dozen list to inform the public on what the Service will be focusing on and to warn tax return preparers about these same areas.
While acknowledging that these micro captive insurance companies may be legitimate, the IRS then states that many of these companies are being created and operated for tax versus business reasons. As we represent a wide array of taxpayers in the captive insurance area, let’s take a moment to outline what the IRS is looking at and what we know about the large number of examinations now underway.
How Micro Captives Work
As the IRS admits, Micro Captive Insurance Companies (CICs) are permitted under the tax law. CICs insure the risks of related smaller businesses, and in general, captive managers assist these businesses in forming and running the CIC. Most often the captive manager also will operate a risk pool in which the CIC participates, as do many other unrelated CICs.
The IRS however has become increasingly concerned with how captive managers market CICs, how risk pools operate and how a small business runs its captive.
The Risks of Non-Compliance
The risk is large if the IRS knocks on the door of a captive owner. If the IRS refuses to treat the CIC as an insurance company, there is a reversal of all deductions for insurance premiums for each year they are paid to the captive (that can be up to $1.2 million per year in disallowed premiums). In addition, the IRS will add penalties (often another 20% of the total) as well as interest. The IRS is also considering the use of a new economic substance penalty (increasing the accuracy penalty from 20% to 40%). As you can see, this can be devastating to a small business and its owners.
What We Know Today
Here is what we know as of now regarding the IRS’s recent enforcement activities for CICs
First, we know that there are several captive managers under investigation. The focus appears to be on how the CICs are being marketed and how the risk pool is designed and operated
CAPTIVE EXPERTS LLC
ReplyDeleteTurnkey Services
About Captives
Risk Management
Captive Taxation
More Info
Loss & Claim Report Form
IRS 831(b) Captive Tax Audit Concerns
By Tom CifelliSeptember 12, 2014Captive Formation and Management, Captive TaxationNo Comments
0 0 0 0
September 12, 2014
by Tom Cifelli, Managing Director
CAPTIVE TAX AUDIT CONCERNS
If you engage a captive manager with experience you should not be concerned about tax or regulatory audits other than the extra time and expense they might incur to defend positions taken. The IRS and the industry have established pretty clear guidance on what is required for a captive program to be created for legitimate business purposes and what a solid design and management program looks like.
The increased attention by the IRS in auditing 831(b) electing captives and even doing some promoter audits is a good thing; it will force all firms to improve practice standards and others to get out of the industry where they lack requisite skills and experience to properly design, form and manage excellent customized captive risk management solutions. There most certainly are promoters pushing tax shelter attributes of captives and buying life insurance with pre-tax captive dollars who are not focused on helping clients improve risk management. These promoters are hurting the captive industry and may be found in violation of tax shelter promotion restrictions.
Some captive managers who are legitimately trying to help clients improve risk managers may be found to have defectively designed programs for a variety of reasons ranging from poor underwriting to defective risk pool structures and practices.
The IRS audit activity increase in recent years is not isolated to captives. Click here for a law firm release advising clients the IRS tax audit activity has been increasing across many areas under President Obama’s administration. The IRS audit of captives is certainly nothing new; from 1970s until 2001, the IRS challenged every captive program. It was only due to its many defeats in court that in 2001 it abandoned its economic family doctrine challenge to captives and adopted the seminal 2002 revenue rulings that underlie the industries accelerated growth in recent years.
Properly designed and managed 831(b) electing captives should still be fine, and should expect no audit adjustments required after an IRS review. Some may be required to defend positions taken in tax court, as the IRS continues taking some unreasonable positions despite acknowledging the importance of captives to an increasing number of US businesse
CAPTIVE EXPERTS LLC
ReplyDeleteTurnkey Services
About Captives
Risk Management
Captive Taxation
More Info
Loss & Claim Report Form
IRS 831(b) Captive Tax Audit Concerns
By Tom CifelliSeptember 12, 2014Captive Formation and Management, Captive TaxationNo Comments
0 0 0 0
September 12, 2014
by Tom Cifelli, Managing Director
CAPTIVE TAX AUDIT CONCERNS
If you engage a captive manager with experience you should not be concerned about tax or regulatory audits other than the extra time and expense they might incur to defend positions taken. The IRS and the industry have established pretty clear guidance on what is required for a captive program to be created for legitimate business purposes and what a solid design and management program looks like.
The increased attention by the IRS in auditing 831(b) electing captives and even doing some promoter audits is a good thing; it will force all firms to improve practice standards and others to get out of the industry where they lack requisite skills and experience to properly design, form and manage excellent customized captive risk management solutions. There most certainly are promoters pushing tax shelter attributes of captives and buying life insurance with pre-tax captive dollars who are not focused on helping clients improve risk management. These promoters are hurting the captive industry and may be found in violation of tax shelter promotion restrictions.
Some captive managers who are legitimately trying to help clients improve risk managers may be found to have defectively designed programs for a variety of reasons ranging from poor underwriting to defective risk pool structures and practices.
The IRS audit activity increase in recent years is not isolated to captives. Click here for a law firm release advising clients the IRS tax audit activity has been increasing across many areas under President Obama’s administration. The IRS audit of captives is certainly nothing new; from 1970s until 2001, the IRS challenged every captive program. It was only due to its many defeats in court that in 2001 it abandoned its economic family doctrine challenge to captives and adopted the seminal 2002 revenue rulings that underlie the industries accelerated growth in recent years.
Properly designed and managed 831(b) electing captives should still be fine, and should expect no audit adjustments required after an IRS review. Some may be required to defend positions taken in tax court, as the IRS continues taking some unreasonable positions despite acknowledging the importance of captives to an increasing number of US businesse
On February 3, 2015, the Internal Revenue Service issued IR 2015-19, which added certain micro captive insurance companies to the IRS “Dirty Dozen” list. The IRS publishes the Dirty Dozen list to inform the public on what the Service will be focusing on and to warn tax return preparers about these same areas.
ReplyDeleteWhile acknowledging that these micro captive insurance companies may be legitimate, the IRS then states that many of these companies are being created and operated for tax versus business reasons. As we represent a wide array of taxpayers in the captive insurance area, let’s take a moment to outline what the IRS is looking at and what we know about the large number of examinations now underway.
How Micro Captives Work
As the IRS admits, Micro Captive Insurance Companies (CICs) are permitted under the tax law. CICs insure the risks of related smaller businesses, and in general, captive managers assist these businesses in forming and running the CIC. Most often the captive manager also will operate a risk pool in which the CIC participates, as do many other unrelated CICs.
The IRS however has become increasingly concerned with how captive managers market CICs, how risk pools operate and how a small business runs its captive.
The Risks of Non-Compliance
The risk is large if the IRS knocks on the door of a captive owner. If the IRS refuses to treat the CIC as an insurance company, there is a reversal of all deductions for insurance premiums for each year they are paid to the captive (that can be up to $1.2 million per year in disallowed premiums). In addition, the IRS will add penalties (often another 20% of the total) as well as interest. The IRS is also considering the use of a new economic substance penalty (increasing the accuracy penalty from 20% to 40%). As you can see, this can be devastating to a small business and its owners.
What We Know Today
Here is what we know as of now regarding the IRS’s recent enforcement activities for CICs
First, we know that there are several captive managers under investigation. The focus appears to be on how the CICs are being marketed and how the risk pool is designed and operated
On February 3, 2015, the Internal Revenue Service issued IR 2015-19, which added certain micro captive insurance companies to the IRS “Dirty Dozen” list. The IRS publishes the Dirty Dozen list to inform the public on what the Service will be focusing on and to warn tax return preparers about these same areas.
ReplyDeleteWhile acknowledging that these micro captive insurance companies may be legitimate, the IRS then states that many of these companies are being created and operated for tax versus business reasons. As we represent a wide array of taxpayers in the captive insurance area, let’s take a moment to outline what the IRS is looking at and what we know about the large number of examinations now underway.
How Micro Captives Work
As the IRS admits, Micro Captive Insurance Companies (CICs) are permitted under the tax law. CICs insure the risks of related smaller businesses, and in general, captive managers assist these businesses in forming and running the CIC. Most often the captive manager also will operate a risk pool in which the CIC participates, as do many other unrelated CICs.
The IRS however has become increasingly concerned with how captive managers market CICs, how risk pools operate and how a small business runs its captive.
The Risks of Non-Compliance
The risk is large if the IRS knocks on the door of a captive owner. If the IRS refuses to treat the CIC as an insurance company, there is a reversal of all deductions for insurance premiums for each year they are paid to the captive (that can be up to $1.2 million per year in disallowed premiums). In addition, the IRS will add penalties (often another 20% of the total) as well as interest. The IRS is also considering the use of a new economic substance penalty (increasing the accuracy penalty from 20% to 40%). As you can see, this can be devastating to a small business and its owners.
What We Know Today
Here is what we know as of now regarding the IRS’s recent enforcement activities for CICs
First, we know that there are several captive managers under investigation. The focus appears to be on how the CICs are being marketed and how the risk pool is designed and operated