Subscribe Sign In Apr 26, 2021,01:12pm EDT|1,378 views The IRS Warns Again On Microcaptives And Announces A New Office Of Promoter Investigations Jay AdkissonContributor Personal Finance I cover Wealth Preservation in its legal permutations Listen to article Charles Rettig, Commissioner of the Internal Revenue Service (IRS), has set up an Office of ... [+] © 2020 BLOOMBERG FINANCE LP On April 9, 2021, the IRS News Release IR-2021-82, which advised that the IRS had the previous month won another so-called "microcaptive" case before the U.S. Tax Court, being the Caylor Land decision which you can read about here. The New Release reiterates that the IRS will disallow deductions taken for premium payments to abusive 831(b) captive arrangements, will impose the 40% penalty for lack of economic substance, and (if a taxpayers doesn't see the light and settle pretty quickly) may also treat the payments to the captive as taxable non-insurance income and assert a withholding liability on non-U.S. domiciled captives. This is all pretty much the same position that the IRS was taking before the Caylor Land decision, but the IRS likes to put out new releases like these at tax season to remind tax preparers to be on the lookout for these types of transactions and to warn their clients still in them that they had better get an independent second opinion from knowledgeable tax counsel before they file their returns. In other words, there is nothing really new in this particular News Release, but the IRS is using that vehicle as a friendly reminder while folks get their returns together. Much more interesting is IRS News Release IR-2021-88, which followed ten days later on April 19, 2021. This announcement revealed that the IRS has established a new Office of Promoter Investigations ("OPI") to go after the folks who peddle tax shelters. The new OPI will bring under its umbrella the IRS teams and employees who conduct promoter audits, but which were strung out over several internal divisions within the IRS such that their efforts were either poorly coordinated, if at all, or at best inefficient. Bringing all these dispersed resources into one office will allow the IRS to identify, stop, and seek promoter penalties with much greater concentration of effort. The OPI will be headed by Ms. Lois Deitrich, a 20-year IRS veteran, as its new acting director. At least initially, the OPI will focus on two groups of promoters: Those who have peddled syndicated conservation easement transactions and those who have sold microcaptive insurance arrangements. Leaving conservation easement promoters for another day, let's consider what that might mean in the microcaptive sector. First, and most obviously, the captive managers who have sold risk-pooled 831(b) captives are going to be squarely in the bullseye of OPI. While nobody outside the IRS seems to know exactly how many promoter audits have already been started of captive managers, there seems to be a general feeling that it is somewhere between a half-dozen and a dozen such captive managers. Suffice it to say that being the subject of a promoter audit is not something that captive managers would want to publicly tout, and at least one captive manager of which I am aware has actively deceived its own clients by telling them that it is not under a promoter audit, when it in fact is. The bottom line, however, is that probably each and every captive manager who has clients with 831(b) captives that participated in a risk pool are sooner or later going to find themselves in a promoter audit. Maybe some of the smaller captive managers will stay off the radar screen, maybe they will not. We'll see. MORE FOR YOU How To Get Approved For Student Loan Forgiveness Student Loan Forgiveness Won’t Be Available For Everyone, But This Plan Is Available Now Biden Cancelled $1.5 Billion Of Student Debt For Borrowers, But You Can Still Apply Now The second group of folks who are going to be in the promoter audit target area will be facilitators, being professionals who provided some service or another to the captive managers so that they could draft insurance policies, etc. Here, I am talking about the actuaries who gave actuarial reports and underwriters (to the extent they were not in-house to the captive manager) to facilitate microcaptive arrangements. The actuaries are probably at the greatest risk, as it seems anecdotally that something less than a dozen actuaries or actuarial firms were providing the actuarial studies used by probably 90% of all microcaptives. By now the IRS knows who these actuaries are as well as anybody. Take down the actuaries, and the whole tax-sheltered captive business dies; the IRS is probably as aware of that as anybody too. To a lesser degree, there might also be exposure for certain CPA firms that attracted perhaps more than their fair share of microcaptive business, but whether the OPI will consider tax preparers for captives to be a "promoter" is anybody's guess. Ironically, the OPI will not go after one of the most important, prolific, and arguably abusive of the folks involved in microcaptives, which are the state regulators. Issues of state sovereignty prevent this, but there can be no doubt that some of the state regulators were even more in bed with obviously abusive captive schemes than the actuaries. The state regulators knew exactly the game they were playing, they signed off on policies with no real risk and inflated premiums, and turned a blind eye to all sorts of hinky transactions ⸺ all in the name of increasing their captive numbers so that they could get a pat on the back from their state's legislature when revenue was discussed. They'll end up skating on promoter liability, not even getting a nasty letter, although their culpability was ultimately as great as anybody's in this business. Curiously, many of the captive managers subject to promoter audits have continued to promote new captives and manage old captives long after the writing has been on the wall. Their attitude seems to be: Make as much money as you can now, because the music will be ending soon. Plus, once they are shut down, what else are they going to do? Which is to say that one of the main jobs of the new OPI will be to stop promoters from continuing to sell new captives or even manage existing captives, and thus finally put an end to their activities. I've long thought, and have previously written, that it would take a promoter injunction by DOJ-TAX to finally send a message, but who knows whether that will ever happen. Perhaps the new OPI can get the job done by the expedient of finally levying the promoter penalties that have so far been held in abeyance while the IRS works through the glut of microcaptives that is taking up a great deal of its most valuable manpower and also clogging the U.S. Tax Court with cases. But, shut somebody's captive manager down and their client participants will probably get the message. It is difficult to know what effect that the new OPI might have on the participants in these arrangements, if any, since in most cases the IRS has already obtained the clients lists of the abusive promoters through subpoenas and other means. Where there might be an effect would be in those situations where a captive manager and its clients have so far escaped unnoticed, but OPI picks them up. We'll see. For what it is worth, I've noticed a trend involving small captives in which the small captives that were legitimate all along tend to convert from 831(b) to 831(a) captives because they really do need the insurance, while the captives that were set up predominantly for tax shelter reasons are simply closing down. That does make some sense: A captive which really does provide real insurance will work about as well, if perhaps not quite as efficiently, as an 831(a) captive than an 831(b) captive, but a captive which is not actually providing an insurance function makes utterly no sense as an 831(a) company and so there is no good reason for its owner to keep it going. This does not mean that by becoming an 831(a) captive, whatever ills happened while the captive was operating under the 831(b) election are somehow magically wiped away, but I think it probably is some indication that the intent of the captive owner was to run a bona fide insurance captive and not a tax shelter captive. Before I conclude this article, I had better give the caveat that what is happening with microcaptives, i.e., risk-pooled 831(b) companies or naked tax shelter captives, is affecting only a relatively small part of the captive sector. While microcaptives are generating a lot of press, nearly all of it bad, the premiums paid by such companies are almost minute when compared to the premiums paid by the larger corporate captives and other legitimate captives (think Senator Grassley's farm cooperatives) which are not under any scrutiny at all. Frankly, the legitimate captive industry will breathe a sign of relief when the IRS has finally cleared out all the abusive microcaptives, and everybody else can get back to normal without all this nonsense floating about. Anyway, it is all interesting to watch, through probably a little too interesting for the captive managers involved. Stay tuned. Follow me on Twitter or LinkedIn. Check out my website or some of my other work here. Jay Adkisson I am a partner of Adkisson Pitet LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My... 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