Showing posts with label Audits. Show all posts
Showing posts with label Audits. Show all posts
L Wallach Captive Insurance: Section 79, Captive Insurance, IRS Audits and Laws...
L Wallach Captive Insurance: Section 79, Captive Insurance, IRS Audits and Laws...: by Lance Wallach IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A - By Lance Wallach...
The IRS looks at captives and often audits them. Below are a few ideas about captives.
Successful captive programs have some or most of the
following attributes. Some can be planned for at inception, while others need
to be managed and realized over time. Success factors include:
1. Spread of risk with predictable losses –
Successful captive owners focus on the risks they understand best – their own –
and avoid the temptation to compete against commercial insurers. Successful
captives also can enjoy a favorable risk spread either by having a sizeable
exposure base or by incorporating a number of lines of coverage with limited
correlation.
2. Good loss experience and control -- The success of
a captive program can only be as good as its underlying loss experience. The
best way to manage underwriting results is via targeted and rigid loss control
and safety programs. Poorly managed risk programs are probably better insured
by the commercial markets, no matter how over-priced the market might appear.
3. Fronting and reinsurance support -- Some captive
programs cannot operate or grow without adequate fronting and/or reinsurance
support. Accordingly, captive owners should look to identify fronting insurers
or reinsurers with whom they can partner even if the affiliation might mean
paying slightly more in any given year. It is important that the front or
reinsurer be there through both good and bad years.
4. Financially stable parent(s) -- Most successful
captive programs have financially sound parent(s) or insured’s that are able to
pay the premium for the risk insured each year and provide additional capital
for growth or to weather bad years. A captive should not be viewed as a piggy bank
that can be plundered whenever a new pet project comes along or to subsidize
other divisions when they experience difficulties.
5. Credible non-tax business purpose -- Successful
captives are formed for true and identified risk management reasons. Those
formed solely for tax reasons rarely survive over time. Tax benefits, if any,
should be viewed as a bonus.
6. Strong business partners -- Since captive owners
are seldom proficient in the business of insurance, very few captives are
self-managed. It is crucial that a prospective captive owner retain strong
business partners who possess both industry knowledge of the captive’s parent
as well as a good understanding of the captive industry and how it is evolving.
Business partners should be innovative and focused solely on the success of the
captive itself.
7. Long-term commitment – The captive should be
managed and viewed as an ongoing entity. Depending upon the lines of coverage
insured, the success of a captive may not be quantifiable for five or ten years
– perhaps longer. The long-term view can be difficult to master given the
often-narrow business focus that demands meeting next quarter’s budget targets.
8. Positive financial return -- While many captive
programs are primarily cost centers, they should be evaluated constantly
against the benefits they provide to the organization as a whole. Only captive
programs with positive financial returns will achieve full upper-management
support and be allocated the resources needed to reach their full potential.
9. Continuous evaluation -- The captive should be
evaluated regularly to ensure efficient management of retained risk across the
enterprise. Often, risks originally retained by the captive may be more
economically insured by commercial markets. Alternatively, risks previously
deemed non-existent or minor may be ideal for the captive.
10. Be prepared for an IRS audit. Check the history of the
people that want to help you with the captive. If they have sold other
programs, like 412i, 419 or other abusive tax shelters do not use them.
Section 79, Captive Insurance, IRS Audits and Lawsuits on 419 and 412i Plans - HGExperts.com
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| by Lance Wallach |
IRS Attacks Business Owners in 419, 412, Section 79 and Captive Insurance Plans Under Section 6707A - By Lance Wallach - Taxpayers who previously adopted 419, 412i, captive insurance or Section 79 plans are in big trouble. In recent years, the IRS has identified many of these arrangements as abusive devices to funnel tax deductible dollars to shareholders and classified these arrangements as listed transactions."
These plans were sold by insurance agents, financial planners, accountants and attorneys seeking large life insurance commissions. In general, taxpayers who engage in a “listed transaction” must report such transaction to the IRS on Form 8886 every year that they “participate” in the transaction, and you do not necessarily have to make a contribution or claim a tax deduction to participate. Section 6707A of the Code imposes severe penalties for failure to file Form 8886 with respect to a listed transaction. But you are also in trouble if you file incorrectly. I have received numerous phone calls from business owners who filed and still got fined. Not only do you have to file Form 8886, but it also has to be prepared correctly. I only know of two people in the U.S. who have filed these forms properly for clients. They tell me that was after hundreds of hours of research and over 50 phones calls to various IRS personnel. The filing instructions for Form 8886 presume a timely filling. Most people file late and follow the directions for currently preparing the forms. Then the IRS fines the business owner. The tax court does not have jurisdiction to abate or lower such penalties imposed by the IRS.
Captive Insurance
Just
a few years ago, captive insurance companies were a hot news item in the arcane
world of abusive tax shelters. Sleazy promoters were signing up small businesses
in droves. If you created a cell captive as a property and casualty loss
management tool, it’s probably legitimate. If you “bought” an off the shelf
captive from a promoter who promised tax savings, there is a good chance you own
an abusive tax shelter.
After
the initial wave of fraud and audits, many of the bad promoters went away. New
reports suggest that captives are again making a comeback. And with the next
generation of captives will come the inevitable fraudsters looking to catch a
free ride on the resurgent popularity of these products.
The
new wave of captive insurance companies are sometimes called cell captive
insurance companies or “group captives.” We have also seen them called
rent-a-captive, segregated account companies, segregated portfolio companies and
incorporated protected cell companies. Whatever they are called, if properly set
up they can be completely legal and valuable risk management tool.
The
IRS issued a bulletin in 2008 to give guidance on these products
including whether premiums can be deductible as insurance costs. The IRS says
there must be adequate risk shifting and distribution to be considered
“insurance.”
The
scam promotions typically offer to shelter a large sum of money by calling it an
insurance premium. The premium is usually the same dollar amount as the
deduction you seek. The promoter offers “insurance” on a highly improbable risk.
Hurricane insurance in Nebraska, anyone? Magically, you get a big deduction and
in a few years you are promised the ability to get back your money in the form
of a “premium refund” or dividend. Sound familiar? You probably purchased an
abusive tax shelter.
If
you think that you have one of these products, seek legal help immediately.
First, the premiums in bogus captive insurance companies or cell captives are
not deductible. That has significant tax implications and likely involves big
civil penalties too.
Because
the IRS views many of these schemes as abusive tax shelters, there are special
penalties that apply. If the IRS finds that your captive insurance resembles an
illegal welfare benefit scheme (sometimes called 419 or 412 plans), your plan
might be considered a listed transaction subject to penalties of $100,000 or
more per year.
Abusive
tax shelters can also be criminally prosecuted.
Another
danger is that in many of the cell captive frauds, the money is simply not there
when you go to cancel the policy and seek a refund of premiums.
It’s
not always promoters who sell the bad plans. We know of otherwise honest
insurance agents and even accountants who were roped into selling these
products. Many promoters lure agents into their scheme by offering legitimate
looking “legal” opinion letters and slick marketing materials. If an agent or
accountant sold or recommended the plan, you may still be able to recover your
damages if the promoter – and your money – is long gone. (Insurance agents love
these plans because they usually pay above average commissions – another red
flag.)
According
to a recent story in Captive Review, Bahamian cell captives have “risen from
extinction” and are making a dramatic resurgence. Cell captives are currently
offered in Guernsey, Jersey, Malta, Gibraltar, Isle of Man, Bahamas, Bermuda,
the British Virgin Islands, Anguilla and Dubai. In the United States, they may
be offered in Nevada, Washington, Montana, Hawaii, Kentucky, South Carolina and
Oklahoma. Because they can be created in certain states doesn’t mean they pass
IRS muster, however.
Whatever
you do, don’t wait until the IRS finds you or until you discover that your
premium refund isn’t coming. If you have questions about your cell captive or
captive insurance company, give us a call. We also represent owners of phony
welfare benefit plans, 419 and 412 plans. Our tax and fraud lawyers can help you
determine if your cell captive or other plan is legitimate and if not, unwind
the transaction and get back your hard earned money.
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