The Reporting of Micro-captive Transactions

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On behalf of Silver Tax Group posted in IRS Tax Audits on Thursday, May 18, 2017.

The IRS is always looking for ways to collect more revenue. One method is to target micro-captive transactions. A micro-captive transaction is one where a taxpayer attempts to reduce their taxable income through the use of insurance contracts.

Micro-captive transactions

Under micro-captive transactions, the taxpayer may claim a deduction for their insurance premiums. The insurer (the “captive insurance company”) can also elect to pay taxes only on the investment income. In any case, as of the beginning of May the IRS requires disclosures concerning these transactions. And according to many tax preparers, the new reporting requirements are complex. Unfortunately, the failure to properly report micro-captive transactions could result in IRS action.

The new rules will require Michigan taxpayers to provide in-depth information regarding a variety of items. One tax attorney said that reporting such information “required a lot of expertise.” This includes having extensive knowledge regarding the operations of the captive insurance company. And even in a just a single transaction, there may be multiple parties providing information.

We don’t know if the IRS will provide additional guidance on micro-captive transactions. But as we are early in the process, there is likely to be additional changes concerning reporting requirements.

Having a tax attorney on your side

As the reporting requirements concerning micro-captive transactions are confusing, disputes concerning compliance with these requirements will likely be common. Defending against such disputes could also prove difficult for many taxpayers, and the tax penalties may be harsh. For that reason, having an attorney on your side who can provide guidance regarding reporting and who will defend your interest could be extremely helpful.

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