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Texas Society of Certified Public Accountants Guest Blog: "Changing Tide for IRS Enforcement of Microcaptive Insurance"

November 22, 2021

Article by Leo Unzeitig on "Changing Tide for IRS Enforcement of Microcaptive Insurance"

Texas Society of Certified Public Accountants' Blog

In a recent Texas Society of Certified Public Accountants’ blog, Leo Unzeitig, associate in our San Antonio tax controversy and tax planning practices, addresses the lack of IRS guidance on what constitutes “insurance” under Tax Code Section 831(b), which provides important tax benefits to small insurance companies.

Unzeitig also discusses enforcement efforts by the IRS related to microcaptive insurance, including the 12 exam teams collectively termed the “Tiger Team,” who use a list of taxpayers from a Form 8886 filing requirement to open examinations, disallow the benefits provided by Section 831(b), and assert 40% lack-of-economic substance penalties. Finally, he considers the impact of recent Tax Court case, Puglisi v. Commissioner, Dkt. No. 2796-20, where the IRS conceded the deficiency determination for a microcaptive insurance company before trial.

According to Unzeitig, given the significant resources the IRS has devoted to challenging captive insurance companies and the Section 831(b) election, it is unlikely that the Tiger Team will slow or disband. However, the result from Puglisi may be promising in at least one regard: the IRS appears to believe there are some instances where taxpayers may qualify for the election. Reliable guidance on what those situations are is needed to avoid unnecessary audits and trials and to make enforcement easier on both parties.