Retroactive Change – Immediate Action May be Required
Recent IRS Notice Requires Retroactive Reporting for Specified “Micro-Captives” Transactions
The Internal Revenue Service (IRS) has recently issued IRS Notice 2016-66 which identifies transactions involving micro-captive transactions as reportable transactions that must be disclosed to the IRS. Furthermore, the disclosure requirement is retroactive and taxpayers who fail to timely disclose such transactions are subject to severe tax penalties.
Notice 2016-66 identifies Internal Revenue Code (“IRC”) § 831(b) Micro-Captive transactions (“micro-captives”) as “transactions of interest” and requires reporting to the IRS in certain situations. The IRS is evaluating whether such transactions are abusive. An abusive micro-captive transaction is a type of transaction in which a taxpayer attempts to evade taxation by entering into contracts with a related company that is treated as a captive insurance company, using inflated premiums, and taking advantage of IRC § 831(b)’s election to have a small insurance company taxed only on its investment income. Whether or not the transaction is deemed abusive, if a transaction meets the criteria specified in Notice 2016-66, then the transaction must be reported to avoid penalties.
Taxpayer Disclosure of IRC § 831(b) Micro-Captive Transactions
Generally, taxpayers who have entered into micro-captive transactions on or after November 2, 2006 are required to disclose the transactions on Form 8886 with the Office of Tax Shelter Analysis by May 1, 2017. No extension is available.
Taxpayers who have already filed tax returns with these transactions should take appropriate corrective action to ensure that the proper disclosure is made. Failure to disclose transactions that are the same as, or substantially similar to the transactions described as micro-captive transactions in Notice 2016-66 can have severe tax consequences.
If you have engaged in a transaction identical or similar to an 831(b) micro-captive, please contact us so that we may assist you with the preparation and timely filing of the appropriate disclosures.
We understand that the new reporting requirements are very complex, so please contact your Keiter representative, email or call with any questions or concerns regarding the applicability of these new requirements to you.
-Your Keiter Tax Team
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.