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IRS Stays True to its Word and Stiffens Microcaptive Settlement Terms

By Anthony P. Daddino on October 22, 2020

Earlier today, the IRS announced a second time-limited settlement initiative for certain taxpayers under audit who participated in microcaptive insurance transactions.  

Only taxpayers who receive an offer letter are eligible for this settlement.  The IRS stated that it is limiting the settlement to (i) taxpayers with at least one open year under exam, and (ii) taxpayers with unresolved years under the jurisdiction of the IRS Office of Appeals.  Those taxpayers with microcaptive tax disputes docketed in Tax Court are generally not eligible.  

The IRS did not disclose the precise terms of settlement –  only that “our offer terms are only getting stricter.”  Under the first settlement initiative, the IRS allowed only 10% of the deduction for premiums with 0% of the deduction for professional fees including captive manager fees.  The IRS also demanded a 10% accuracy-related penalty, subject to (i) a 5% reduction where the taxpayer attests under oath that it did not previously participate in a “reportable” transaction, and (ii) an additional 5% reduction where the taxpayer relied on a disinterested tax advisor and the advisor attests under oath regarding the advice given. 

Check back soon for a blog post identifying the economic terms of this second settlement initiative, as well as key factors that should be considered in helping your client make a settlement decision.

If you have any questions about this blog post or any other tax-related matter, please do not hesitate to contact me at (214) 749-2464 or adaddino@meadowscollier.com.