So-called micro-captives, small captive insurance companies that elect to be taxed under section 831(b) of the Internal Revenue Code, which allows small insurance companies to be taxed only on their investment income, have been the target of IRS scrutiny in recent years.
In 2020, the agency deployed 12 new micro-captive examination teams to substantially increase its examinations of micro-captive insurance transactions, while in April 2021, it warned participants in abusive micro-captive arrangements to exit those arrangements as soon as possible. Days later, the IRS announced that it had formed an office to coordinate the agency’s focus on abusive tax avoidance transactions, including abusive micro-captive insurance arrangements.
In January, the IRS announced that it was looking to hire up to 200 additional tax attorneys to focus on abusive tax schemes, including abusive micro-captive arrangements.