Micro-Captives & New IRS Settlement Offer

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On September 16, 2019, the Internal Revenue Service (IRS) announced IR-2019-157, a limited-time global settlement offer for certain taxpayers under audit who participated in what the IRS has deemed as abusive micro-captive insurance transactions.  A letter from the IRS will notify only the taxpayers who are eligible for the offer.  In its announcement, the IRS noted about 200 taxpayers will be eligible.

Like all settlement offers, IR-2019-157 involves a concession of substantial income tax benefits and the possibility of some relief from certain penalties.  The taxpayers who receive the settlement offer will be afforded an opportunity to resolve the audit on terms far more favorable than those that will, in all probability, be dictated to them if they proceed forward with the audit and contest the resulting assessment in U.S. Tax Court.  To date, the IRS has won three micro-captive cases.  The rationale for the global settlement lies in the expectation that the existing IRS victories will allow it to prevail in future litigation.

Taxpayers eligible for the global settlement offer should consider retaining tax counsel to evaluate the terms and conditions of the proposed settlement offer.  Promoters and consultants involved in forming the micro-captives have not been included within the scope of the settlement offer. Participants in programs taxed under section 831(b) of the Internal Revenue Code that are not currently under audit and who have not previously completed a tax review should strongly consider doing so at this time.