On Sept. 16, 2019, the IRS announced it is offering settlements to certain taxpayers with open audits of micro-captive insurance transactions. The IRS has targeted these micro-captive insurance transactions since 2014, and they were designated as transactions of interest in 2016.1 Although micro-captive insurance transactions have gained popularity among closely held entities, the IRS has challenged such transactions as abusive, stating that they “are inconsistent with arm’s length transactions and sound business practices.”2
Following several IRS victories in the U.S. Tax Court, the IRS decided to offer settlements to taxpayers currently under examination and mailed settlement letters to up to 200 such taxpayers. This action was not unexpected given the IRS’s three recent victories, described below, and the rash of docketed cases in the Tax Court on this issue. A settlement initiative such as this one represents an effort to deal with the volume of cases. The initiative will resolve more cases without litigation and will produce finality for those accepting the fixed settlement terms.