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IRS Targets Certain 831(b) Captives

04 February 2015

Earlier today the Internal Revenue Service included certain “micro” captives in their list of tax scams for 2015.  Those familiar with these captives know each have made an election under Internal Revenue Section  831(b) to be taxed only on investment income thus underwriting income from taxation.  This election is available to both offshore and onshore captives and it is interesting to note the IRS makes this clear in its release. 
While a number of captive programs successfully use this election for effective tax planning purposes the election has seemed to have provided an opportunity for abuse by promoters. Typically abuse occurs in situations where premiums curiously exceed, sometimes substantially, industry rates and are either priced at exactly or close to the USD$1.2M limit under the election.  This situation coupled, with little to perhaps no losses year over year,  allow for a full deduction for premiums paid by the insured while “sheltering” the premiums from income in the captive creating a disparity favorable to the insure/captive owner. 




Abusive Tax Shelters Again on the IRS's Dirty Dozen List of Tax Scams