Captive Insurance added to IRS “Dirty Dozen” Tax Scams for 2015

Each year, the IRS publishes its “Dirty Dozen” list of Tax Scams for the tax filing season. The purpose is to give taxpayers warning of illegal scams that “can lead to significant penalties and interest and possible criminal prosecution.”

The list includes obvious scams such as identity theft, telephone scams, false promises of “free money” from inflated refunds and tax return preparer fraud.

For 2015, the IRS has added certain captive insurance programs to the list. See http://www.irs.gov/uac/Newsroom/Abusive-Tax-Shelters-Again-on-the-IRS-Dirty-Dozen-List-of-Tax-Scams-for-the-2015-Filing-Season) This is significant as it confirms the IRS view that these programs are fraudulent and pervasive.

The IRS recognizes that captive insurance companies may be legitimate, but considers the following to be evidence of fraudulent programs:

  • The “insurance” provided by the captive is often based on policies that cover ordinary business risks or esoteric, implausible risks for exorbitant premiums.
  • The company purchasing the insurance from the captive often continues to maintain their “economic commercial coverage with traditional insurers.”
  • The total amount of premiums often equal the amount of deductions needed by the business entity or may exactly total the amount that can take advantage of the IRS captive provision of $1,200,000.
  • Often, the underwriting substantiation for the policies is insufficient or missing.
  • The Promoters charge hefty fees for managing the captives.

The IRS is currently auditing Promoters of captive insurance programs and has begun opening audits of participating employers (See article http://www.williamscoulson.com/help-my-captive-insurance-company-is-under-irs-audit/).

In response to a volume of questions about illegal captives from taxpayers both under audit and not under audit, Williams Coulson will host a question and answer session on February 13, 2015 at 3:00, est. To sign up for the hour long call, please call Shirley Garvey at (412) 454-0200. To email questions in advance of the call, please send them to mlloyd@williamscoulson.com with the following in the subject line “Captive Call Question”.

By Michael Lloyd 2/4/15

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