Microcaptives Make Internal Revenue Service 2024 ‘Dirty Dozen’ List of Tax Scams

The federal Internal Revenue Service listed microcaptive insurance programs on its 2024 "Dirty Dozen" list of 12 tax scams, saying the programs can prove to be bogus tax avoidance strategies.

Source: AM Best | Published on April 17, 2024

Microcaptives make IRS Dirty Dozen list

The federal Internal Revenue Service listed microcaptive insurance programs on its 2024 “Dirty Dozen” list of 12 tax scams, saying the programs can prove to be bogus tax avoidance strategies.

The IRS has prevailed in multiple recent tax court cases involving the arrangements and last year moved to place more regulatory oversight on them. The agency in the past has argued they don’t provide insurance and allow entities to make improperly tax deductions.

“Abusive microcaptives involve schemes that lack many of the attributes of legitimate insurance,” the IRS said. “These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages.”

Premiums paid under the microcaptive arrangements are often excessive and reflecting pricing that isn’t “arm’s length,” the IRS said.

The agency reaffirmed abusive microcaptive transactions are a high-priority enforcement area for the IRS, and it has won all Tax Court and appellate court cases involving them that have been decided on their merits since 2017.

“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” said IRS Commissioner Danny Werfel in a statement. “Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”

The IRS has released the Dirty Dozen list annually since 2022, highlighting scams that put taxpayers, businesses and the tax professional community at risk of losing money, personal information, data and more, the agency said. Along with microcaptives, the final installment on the list included syndicate conservation easements, which allow property owners to report a deduction in exchange for limiting land use.

Last month, the IRS won another round of legal wrangling over a dispute with a microcaptive owner’s tax payments for a number of years. Sunil Patel’s businesses supplemented their commercial insurance coverage by purchasing assorted policies from two microcaptive insurance companies that Patel controlled, Magellan Insurance Co., domiciled in St. Kitts, and Plymouth Insurance Co., domiciled in Tennessee.

According to the decision, the premiums paid to the microcaptives were substantially more than the premiums paid to  Patel’s commercial insurers, creating substantial tax benefits for the couple.