The Impact of IRS Victories on Small Business Microcaptive Insurance Owners in the US

The IRS Cracks Down on Microcaptive Insurance: What Small Business Owners Need to Know

As Americans are knee-deep in tax season, small business owners are facing a different kind of tax scrutiny. The IRS has recently scored two significant victories against microcaptive insurance, a form of self-insurance used by many small US businesses.

The cases of Keating v. Commissioner and Swift v. Commissioner have shed light on the IRS’s stance on microcaptives, labeling them as potential tax shelters or schemes. While the Tax Court ruled in favor of the IRS in both cases, the decisions have left many honest microcaptive owners wondering how to structure their arrangements to remain compliant.

Microcaptives operate under Section 831(b) of the tax code, which was created to support small to mid-sized insurance companies by excluding part of their income from taxation. This provision allows these companies to compete with larger insurance providers and was intended to stimulate competition in the industry.

However, the IRS has disclosed that nearly 1,100 microcaptives are under investigation, leading to a state of legal limbo for many small business owners. The agency’s aggressive audit program has targeted a large number of microcaptives, only pursuing cases where they are certain to win, leaving others in uncertainty.

Despite congressional support for microcaptive insurance, the IRS continues to crack down on these arrangements, disregarding the laws passed by elected representatives. Members of the House Ways and Means Committee have expressed concerns about the IRS’s treatment of microcaptives and have called for a collaborative approach to address the issue.

The recent court decisions in Keating and Swift have raised questions about the IRS’s authority to regulate insurance companies, as outlined in the McCarron-Ferguson Act of 1945. While future cases may challenge this overreach, without intervention from Congress or a change in the IRS’s approach, the targeting of microcaptive owners is likely to persist.

Small business owners involved in microcaptive insurance should stay informed about the ongoing developments and seek guidance from experts in the field. The cases of Keating v. Commissioner and Swift v. Commissioner serve as a reminder of the complexities and challenges faced by small businesses in navigating the tax landscape.