IRS Announces Second Captive Settlement Initiative

Printable PDF File Format CLICK HERE

Notes from the Trenches[1]

IRS Announces Second Captive Settlement Initiative


Michael E. Lloyd, Esq.


The IRS just announced a second settlement initiative for captive audits.  In September, 2019, the IRS launched the first settlement initiative that was offered to certain taxpayers under audit with respect to participation in small captive insurance programs.[2]  In January, 2020, the IRS reported that the settlement initiative was a success with more than 80% of the taxpayers accepting the offer to participate.[3]  The IRS has just announced a second settlement initiative that will be offered to taxpayers.[4]

This is what you need to know if you participate in a captive transaction and are currently under audit:

  • The first settlement initiative was made available to 200 taxpayers who participated in the best of the bad captives and were under audit with cases still under the authority of IRS Exam. So, it is possible that you were in Exam in 2019, and did not receive an offer to participate in the first settlement initiative.  You are more likely to receive an offer to participate in this second settlement initiative.
  • The first settlement initiative was not available to cases that were under the authority of Appeals. This second settlement initiative is being made available to cases in Appeals.
  • The second settlement initiative, like the first, is not available to taxpayers not under audit and for taxpayers with docketed cases in Tax Court.
  • The settlement terms will be less friendly to taxpayers than under the first initiative. It is Author’s expectation that there will be some minimum penalty applied and less concession by the Government on the deductions taken.
  • The author believes that the IRS is introducing a second initiative instead of reissuing the first because although the first initiative was successful in the number of taxpayers who accepted the offer to participate, it has been a failure in that it is too complicated and time consuming for the IRS to process the cases. It has been more than a year, and the IRS is just now closing the first of the original settlement initiative cases.
  • It is the author’s understanding that if you agreed to participate in the first initiative but your case has not been finalized yet, you will still be permitted to settle with the IRS under the terms of the first initiative.

This is what you need to know if you participate in a captive program and you are not currently under an IRS audit.

  • This settlement initiative is not for you. Even if you wanted to accept its terms, you are not eligible.
  • Included in the News Release is a statement that the IRS has created 12 new captive audit teams who will be increasing the number of audits of captive transactions.
  • Review my article entitled “Advice for Section 831(b) Captives Who Are Not Under Audit (Yet).” for a plan to review whether your captive is likely to be challenged by the IRS.[5]

If you are under an IRS audit and need representation or you have questions about your captive, call Mike Lloyd at (412) 454-025 or email him at

[1] Michael Lloyd is an attorney who advises business owners on captive insurance programs.  Mike conducts Pre- IRS Audits, and has represented captive business owners under IRS audit in Exam, Appeals and Tax Court.  Mike has settled cases under the first settlement initiative and is also assisting taxpayers who want to make a response to the recent IRS Warning Letter.  Mike also has prepared more than 1,000 IRS Forms 8886.

[2] IR News Release 2019-157, September 16, 2019.

[3] IR News Release 2020-26, January 31, 2020.

[4] IR News Release 2020-241. October 22, 2020.