IRS Audits Captive Owners – Know the Red Flags!
The IRS is currently auditing owners of captive insurance companies who are customers of promoters who are under scrutiny by the IRS. For more information on Promoter audits.
The IRS practice is to identify Promoters who may be improperly selling captive insurance companies and to open audits of the Promoters. From those audits, the IRS obtains customer lists and opens individual audits of some percentage of the customers. Although the IRS recognizes that captive insurance companies can be compliant with tax laws, captive owners should take note of the following red flags which may be scrutinized by the IRS:
Purpose of the Captive. If the Captive is marketed as a tax deduction instead of a manner of addressing necessary insurance, the IRS will perceive that insurance is not the primary purpose. Also, the IRS looks for signs that the real purpose of the Captive is to meet some estate or retirement planning objective of the Captive owner. Unfortunately, if the intent of the Captive owner is not well documented, the IRS will likely refer to the marketing materials from the Promoter as evidence of what is intended.
Spike in Insurance Cost. If the business has a substantial spike in insurance cost because of premiums paid to the Captive with no explanation as to why there is a need for additional insurance, the IRS will perceive that the insurance was not needed before the Captive and is probably not needed after the Captive. It is far better if the Captive can be replacing some commercially purchased insurance, or that there are specific events that relate to the need for new types of insurance.
If you would like more information about captive insurance companies and the IRS red flags, call
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals is a frequent speaker on abusive tax shelters, Captive Insurance and Conservation Easements. He speaks at more than ten conventions annually and writes for over fifty publications. He also is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered and others. Lance Wallach has written numerous books, including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate Gift Taxation and the AICPA best-selling books, Including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots, Sid Kess Practical Alternatives to Commonly Misused and Abused Small Business Tax Strategies: Insuring Your Client’s Future by the Author/Moderator: Lance Wallach, CLU, CHFC, CIMC
Lance Wallach does expert witness testimony and has never lost a case!
Contact Lance Wallach at 516.938.5007