The IRS is growing increasingly uncomfortable that an
increasing number of smaller companies and professional firms have been doing
what larger companies do — creating their own or joining a captive insurer.
The IRS believes some of these smaller companies are
creating these so-called “microcaptives” in order to lower their taxable
incomes and not to insure against risks.
The New York Times recently reported on the types
of captives the IRS is targeting, where the owners claim they are formed to
insure against highly unlikely or costly specific risks but in reality they
rarely pay out any claims, including one set up by a dentist who to
insure against a terrorist attack in his dental office.
Originally, captives were created to provide coverage that
was hard to find in traditional insurance markets but they have expanded well
beyond that to provide almost all types of insurance. Many of the largest
companies have at least one captive today and experts say they are gaining
popularity among smaller and midsized firms, including professional services
firms.
The vehicles are popular because under tax law the owners of
a small insurance company can pay up to $1.2 million in tax-deductible
premiums. Then, under Section 831(b) of the tax code, any small
property/casualty insurer with annual premiums under $1.2 million may choose to
be taxed on its net investment income as opposed to its premium income.
The 831(b) alternative tax provision used by microcaptives
is also used by small, mutual and often rural insurance companies.
In February, the IRS placed captive insurance on its “Dirty
Dozen” list of abusive tax scams. The IRS also has challenged the tax status of
several microcaptives.
The IRS suspicions over captives is not new. It did not
officially recognize them as legitimate tax structures until 2002. In 2008, it
proposed and then dropped a bid to alter how captives are taxed after
lawmakers from Vermont and other states complained. It has also questioned
payment of what it believes are excessive premiums into captives by some
owners.
Now the IRS is targeting small captives and what is says are
“unscrupulous promoters” who persuade closely held entities to create captives
onshore or offshore. They draft organizational documents and prepare initial
filings to state insurance regulators and the IRS. Then, according to the IRS,
the promoters assist with “creating and ‘selling’ to the entities often times
poorly drafted ‘insurance’ binders and policies to cover ordinary business
risks or esoteric, implausible risks for exorbitant ‘premiums,’ while
maintaining their economical commercial coverage with traditional insurers.”
Captive Insurance Plans are a red flag- Contact Lance Wallach Today 516-938-5007
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ReplyDeletehave a CPA and an Attorney. Why do I need you?
ReplyDeleteLance Wallach
FACT - "The Federal Tax Code is composed of 45,662 pages that require taxpayers to choose from 703 different forms. The Internal Revenue Code has grown to almost 1.4 million words today and is now 500,000 words longer than the Bible."
There is another unequivocal fact that every small businessperson should know - "small privately held businesses pay a considerably higher percentage of their earnings to taxes than do large corporations in America."
Though competent and qualified, the attorneys and accountants serving the small business community are not tax specialists. They are general practitioners. Small business attorneys focus mainly on legal matters such as contracts, entity formation and debt collections. Small business accountants wear many hats, such as: handling the books, interacting with the state and federal revenue services, reconciling bank records, preparing quarterly wage reports, etc. They simply don't have the time to spend 50 hours a week, 52 weeks a year, learning the intricacies of the ever changing tax code and applying the tax saving opportunities that lie within it.
When it comes to taxes, we have consistently found that most small businesses are merely doing year-end compliance work. Year-end tax compliance is what the IRS requires of a business. Basically, your accountant subtracts your expenses from your revenues, throws in the standard deductions and tells you how much you owe Uncle Sam. Does this sound familiar?
Small businesses should, like big businesses, properly structure their organizations to take advantage of the tax code. They should learn the tax reducing opportunities afforded to all businesses, both big and small. veba LLC provides tax expertise that enables the small business owner to legally hold on to a considerably higher percentage of his earnings.
On average, we reduce our clients' tax burdens by 20% to 40%. In fact, if after a complimentary verification of a client's tax disposition, we determine that we cannot reduce his full year tax payout by more than twice our one time fee, we walk away with no obligation to the client. We are so confident in our abilities that we will sign our name to a binding agreement assuring the client those tax savings.
Is your accountant a tax collector for the IRS? Probably. Google his name and Lance Wallach and YOU decide.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance 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 and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com