Wednesday, May 29, 2024
RPT: captive insurance IRS will audit YOU | LinkedIn
RPT: captive insurance IRS will audit YOU | LinkedIn: captive insurance IRS will audit YOU | LinkedIn
Friday, May 17, 2024
Friday, May 3, 2024
419 Plans Attacked by IRS - HG.org
419 Plans Attacked by IRS - HG.org: Insurance agents and costs attacked. - Enrolled Agents Journal March*April - For years promoters of life insurance companies and agents have tried to find ways of claiming that the premiums paid by bu
Internal Revenue Service
On
February 3, 2015, the Internal Revenue Service issued IR
2015-19, which added certain micro captive insurance companies to the IRS
“Dirty Dozen” list. The IRS publishes the Dirty Dozen list to inform the public
on what the Service will be focusing on and to warn tax return preparers about
these same areas.
While
acknowledging that these micro captive insurance companies may be legitimate,
the IRS then states that many of these companies are being created and operated
for tax versus business reasons. As we represent a wide array of taxpayers in
the captive insurance area, let’s take a moment to outline what the IRS is
looking at and what we know about the large number of examinations now underway.
Help! My Captive Insurance Company is Under IRS Audit.
If you are a taxpayer who has come under audit by the IRS
with respect to a captive insurance company, here are some things you should
know.
- Type
of Audit. For this purpose, we can divide the IRS audits into two types.
The first is a random audit on an individual or business, and the second
is a targeted audit. A random audit normally involves a local IRS Agent
and considers on some level the totality of a return filed. In a targeted
audit, the IRS obtained a customer list from the captive Promoter and is
auditing you because you are one of the customers. In a random audit, the
Agent has a checklist to review various items of your return and may spend
little or no time scrutinizing the captive. In a targeted audit, the Agent
is normally well trained in the captive area. Further, in a targeted
audit, the Agent may already have been directed on an IRS position for all
of the captives that relate to that Promoter. Accordingly, the method of
dealing with the Agent is very different in random audits than in targeted
audits.
- Your
Representation. You need to be represented in an IRS audit. The very first
thing you should do upon receiving notification of an audit is to engage
tax counsel. You should not speak to the IRS, answer questions or
participate in an interview without tax counsel.
- Choosing
Tax Counsel. There is no right or wrong choice, but the options normally
include the following:
- Local
CPA. The local CPA is often a good choice because he or she knows your
business and circumstances best. Hopefully, they also were very much
involved in your decision to create a captive and can address questions
with personal knowledge regarding the intent of the captive. The downside
is that some CPAs do not have a lot of experience with IRS audits, and
especially with targeted audits of captives. The CPA will normally be
very frank in their assessment if they believe they are in over their
head. We recommend that even in such cases, that the CPA stay on the
power of attorney and work with other hired counsel.
- Promoter’s
Counsel. Often, the Promoter will provide or refer Counsel to represent
you in audit. The benefits of this are that the Promoter’s Counsel will
most likely be extremely knowledgeable about captives in general and have
inside knowledge of the IRS position with respect to the Promoter’s
captive. Also, the Promoter’s Counsel is sometimes paid by the Promoter.
The down side is that the Promoter’s Counsel may be conflicted and
provide a conflicts waiver for you to sign prior to an engagement.
Basically, the issue is whether the Promoter is representing your
interests or the interests of the Counsel. You may feel that those
interests are the same, and sometimes they are, but sometimes they are
not.
- Outside
IRS Counsel. We are often called upon to represent clients under audit
and have represented more than 500 taxpayers in Promoter transactions in
the last 8 years. We often work with the local CPAs, but also will coordinate
efforts with the Promoter’s Counsel.
- Internal
Audit. It is important at the very outset to review the issues involving
the formation of the Captive and consider whether there are any red flags
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Using Captive Insurance Companies for Savings
Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Read the rest here
Read the rest here
412i Plans | IRS Resoulution Services
412i Plans | IRS Resoulution Services: IRS Resoulution Services
Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season
WASHINGTON — The Internal Revenue Service today said using
abusive tax shelters and structures to avoid paying taxes continues to be a
problem and remains on its annual list of tax scams known as the “Dirty Dozen”
for the 2015 filing season.
"The IRS is committed to stopping complex tax avoidance
schemes and the people who create and sell them," said IRS Commissioner
John Koskinen. "The vast majority of taxpayers pay their fair share, and
we are warning everyone to watch out for people peddling tax shelters that
sound too good to be true.”
Compiled annually, the “Dirty Dozen” lists a variety of
common scams that taxpayers may encounter anytime but many of these schemes
peak during filing season as people prepare their returns or hire people to
help with their taxes.
Illegal scams can lead to significant penalties and interest
and possible criminal prosecution. IRS Criminal Investigation works closely
with the Department of Justice (DOJ) to shutdown scams and prosecute the
criminals behind them.
Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of
abusive domestic and foreign trust arrangements into sophisticated strategies
that take advantage of the financial secrecy laws of some foreign jurisdictions
and the availability of credit/debit cards issued from offshore financial
institutions.
IRS Criminal Investigation (CI) has developed a nationally
coordinated program to combat these abusive tax schemes. CI's primary focus is
on the identification and investigation of the tax scheme promoters as well as
those who play a substantial or integral role in facilitating, aiding, assisting,
or furthering the abusive tax scheme, such as accountants or lawyers. Just as
important is the investigation of investors who knowingly participate in
abusive tax schemes.
What is an abusive scheme? The Abusive Tax Schemes program
encompasses violations of the Internal Revenue Code (IRC) and related statutes
where multiple flow-through entities are used as an integral part of the
taxpayer's scheme to evade taxes. These schemes are characterized by the
use of Limited Liability Companies (LLCs), Limited Liability Partnerships
(LLPs), International Business Companies (IBCs), foreign financial accounts,
offshore credit/debit cards and other similar instruments. The schemes are
usually complex involving multi-layer transactions for the purpose of concealing
the true nature and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to
consider before buying into any arrangements that promise to “eliminate” or
“substantially reduce” your tax liability. If an arrangement uses
unnecessary steps or a form that does not match its substance, then that
arrangement is an abusive scheme. Another thing to remember is that the
promoters of abusive tax schemes often employ financial instruments in their
schemes; however, the instruments are used for improper purposes including the
facilitation of tax evasion.
The IRS encourages taxpayers to report unlawful tax evasion.Find out howto report suspected tax fraud activity.
Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They
are highlighted here because unscrupulous promoters continue to urge taxpayers
to transfer large amounts of assets into trusts. These assets include not only
cash and investments, but also successful on-going businesses. There are
legitimate uses of trusts in tax and estate planning, but the IRS commonly sees
highly questionable transactions. These transactions promise reduced taxable
income, inflated deductions for personal expenses, reduced (even to zero)
self-employment taxes, and reduced estate or gift transfer taxes.
These transactions commonly arise when taxpayers are
transferring wealth from one generation to another. Questionable trusts rarely
deliver the tax benefits promised and are used primarily as a means of avoiding
income tax liability and hiding assets from creditors, including the IRS.
IRS personnel continue to see an increase in the improper
use of private annuity trusts and foreign trusts to shift income and deduct
personal expenses, as well as to avoid estate transfer taxes. As with other
arrangements, taxpayers should seek the advice of a trusted professional before
entering a trust arrangement.
Captive Insurance
Another abuse involving a legitimate tax structure involves
certain small or “micro” captive insurance companies. Tax law allows businesses
to create “captive” insurance companies to enable those businesses to protect
against certain risks. The insured claims deductions under the tax code for
premiums paid for the insurance policies while the premiums end up with the
captive insurance company owned by same owners of the insured or family
members.
The captive insurance company, in turn, can elect under a
separate section of the tax code to be taxed only on the investment income from
the pool of premiums, excluding taxable income of up to $1.2 million per year
in net written premiums.
In the abusive structure, unscrupulous promoters persuade
closely held entities to participate in this scheme by assisting entities to
create captive insurance companies onshore or offshore, drafting organizational
documents and preparing initial filings to state insurance authorities and the
IRS. The promoters assist with creating and “selling” to the entities often
times poorly drafted “insurance” binders and policies to cover ordinary
business risks or esoteric, implausible risks for exorbitant “premiums,” while
maintaining their economical commercial coverage with traditional
insurers.
Total amounts of annual premiums often equal the amount of
deductions business entities need to reduce income for the year; or, for a
wealthy entity, total premiums amount to $1.2 million annually to take full
advantage of the Code provision. Underwriting and actuarial substantiation
for the insurance premiums paid are either missing or insufficient. The
promoters manage the entities’ captive insurance companies year after year for
hefty fees, assisting taxpayers unsophisticated in insurance to continue the
charade
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