by Brian Mahany
Captive Insurance Companies are certainly on the IRS’ radar screen these days. Yesterday, a colleague forwarded me a copy of a summons from the IRS to a New York attorney seeking information on the lawyer’s clients who had done business with Diversified Insurance Company. While getting a summons from the IRS is never great news, it doesn’t mean that anything is wrong.
After seeing the summons, I started doing some digging. I found this great ad for captive insurance companies (CIC) with the following bullet points:
* Businesses receive a 100% deduction for premioms paid
* Money can grow tax deferred
* Money can be removed at the capital gains tax rate
Does all that sound too good to be true? The answer is maybe.
Properly set up, captive insurance companies can deliver the advertised benefits. Unfortunately some promoters became very aggressive with this tool and began to market CIC’s as a method of avoiding taxes or for asset protection purposes. The line between an effective insurance product and an abusive tax shelter is quite thin.
If the captive truly provides valuable insurance services and acts like an insurance company it is more likely to pass muster with the IRS. Captives that use life insurance as an investment vehicle, however, are asking for trouble.
Although the tax code does not prohibit a business from forming a captive insurance company, whether or not the premiums paid for the “insurance” are tax deductible is a different story.
How does Diversified and the attorney fit into this picture is unclear. We have not seen their plan documents and its unclear from the summons how those plans were marketed and funded. Because the IRS is looking for the lawyer’s clients and clients of Diversified, however, we are concerned.
If you have received an audit notice from the IRS or formed a captive based on professional advice and believe that your plan may not pass muster, contact an experienced tax fraud lawyer. Over the last decade, many promoters recommended these plans to thousands of business owners. Unfortunately, many are not legal and may subject the taxpayer to high penalties and the loss of the deductibility of the premiums.
The tax lawyers at Mahany & Ertl have helped many people and small businesses with a wide variety of tax concerns. From fraudulent captive insurance to bogus 419 welfare benefit plans, we help taxpayers unwind these plans and recover penalties from the promoters and sellers of the product.
Mahany & Ertl – Giving Taxpayers a Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California (tax only). IRS services available in all states.