IRS Overreach Threatens Micro-Captive Insurance Industry: A Concerning Picture Emerges
IRS Accused of Overreach in Targeting Micro-Captive Insurance Industry
A pair of federal Tax Court decisions at the start of 2024 have raised concerns about the IRS’s abuse of authority and attempts to exert control over the insurance industry. The victories in Keating v. Commissioner and Swift v. Commissioner have sparked controversy as they targeted micro-captive insurance, a form of self-insurance for small businesses.
The decisions have been criticized for using biased fact patterns to label all micro-captives as tax shelters or schemes, without providing guidance on how honest micro-captive owners can remain compliant with IRS regulations. This lack of clarity has left small to mid-size business owners vulnerable to scrutiny by the IRS, which is seeking to expand its regulatory control over an industry already regulated at the state level.
The 831(b) tax code, originally passed in the 1980s, was intended to empower small to mid-sized insurance companies by providing tax benefits to help them compete with larger providers. However, the recent IRS actions have been seen as a direct contradiction to the purpose of the code, as the agency targets legitimate businesses using micro-captive insurance for risk mitigation.
IRS Commissioner Danny Werfel revealed that nearly 1,100 micro-captives are under investigation, with the agency selectively targeting cases where wins are guaranteed. This approach has been criticized as a deterrent to legitimate businesses seeking to utilize the benefits of the 831(b) tax code.
Members of Congress have expressed their disapproval of the IRS’s treatment of micro-captives and called for a collaborative approach between the agency and the insurance industry to find a mutually agreeable solution. The overreach of the IRS into the regulation of insurance, which is traditionally left to the states under the McCarran-Ferguson Act, has raised concerns about the agency’s intentions to obtain federal oversight over the industry.
Without intervention from Congress or a change in the IRS’s approach, the overreach of power towards micro-captive owners is expected to continue, with potential implications for the broader insurance industry. The ongoing battle between the IRS and the insurance industry highlights the need for clarity and cooperation to ensure a fair and balanced regulatory environment.
