IRS Names 831(B) Micro Captives on Dirty Dozen List

The IRS has named the 2023 Dirty Dozen, an annual list of tax scams for businesses, taxpayers and tax professionals to watch out for. Included in the list is 831(b) or micro captives.

According to the notice, micro captive insurance arrangements, in which an insurance company whose owners elect to be taxed on the captive’s investment income only, micro captives are considered a bogus tax avoidance strategy. As reported by the notice, “abusive micro captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs and, in many cases, unnecessary duplication of the taxpayer’s commercial coverages.”

New Concerns for 831(b) captives

While scrutiny of 831(b) captives is certainly not new, the most recent notice does raise concerns, and captive insurance companies which elect 831(b) status should be on high alert for audit. Tax and legal experts suggest either converting micro captives to an 831(a) election or shutting down the existing captive.

Related Reading: Micro Captives Under a Microscope: Converting Your 831(b) to an 831(a)

The notice also warns of Puerto Rican and foreign captive insurance schemes that lack the attributes of legal insurance. As stated in the notice, “U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for ‘insurance coverage’ provided by a fronting carrier, which reinsures the ‘coverage’ with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legal insurance.”

Talk to an expert at Hylant Global Captive Solutions for advice on your micro captive arrangement.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.