July 26, 2022 - Douglas Myser

IRS says abusive insurance is a sham. The IRS stated that a recent court decision upholds its long standing regarding abusive microcaptive insurance transaction as a sham. Taxpayers are being alerted to the scheme by both the IRS and U.S. Treasury Department. These are peddled by promoters and will cost taxpayers lots of money if they buy into them. In may of 2022, in Reserve Corp v Commissioner, the United States Court of Appeals for the Tenth Circuit appropriately upheld the IRS's position on abusive microcaptive insurance transactions. The Tenth Circuit affirmed the Tax Court, whose decision held that the taxpayer was not engaged in the insurance business and that the purported insurance premiums it received were therefore taxable. After the Tax Court decided in favor of the IRS in numerous cases involving microcaptives, Reserve Mechanical is the first Appellate decision recognizing the IRS position that these abusive transactions are shams. IRS says abusive insurance is a sham. IRS says abusive insurance is a sham.

The IRS encourages anyone considering entering a promoted microcaptive insurance transaction to first speak with a qualified, independent advisor. These transactions will result in serious economic loss to taxpayers, including loss of deductions, required income inclusion and penalties. Taxpayers should understand that the IRS has asserted in many of these cases that the microcaptive insurance transactions lack economic substance and that when transactions are held to lack economic substance, then a 20% penalty (40% is undisclosed) will automatically apply, and it cannot be waived or reduced by the IRS or the courts. Taxpayers who have already engaged in such a transaction should speak with a qualified independent tax advisor about their options, including the Penalty Abatement with the IRS.

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