This is a follow up to an article that I wrote in March of this year concerning captive insurance companies. I simply write this as a warning or  caution to emphasize that the IRS is aggressively reviewing these companies,  even more so when they are used as investment plans.

The IRS is aware  that captive insurance companies have been used improperly. They believe captive insurance companies are being used as fraudulent tax shelters. While many of these captive insurance companies serve legitimate purposes, some do not. The IRS has assessed additional taxes, penalties and/or interest on thousands of taxpayers. The IRS rules require filing Form 8866 for these investments so please see a knowledgeable CPA about these matters. The penalties for failing to file Form 8866 can be $200,000 for a business and $100,000 for an  individual.

If you are starting a captive insurance company or considering investing in one make sure you get a good legal opinion that there exists a legitimate purpose for the entity. If you are selling shares in a captive insurance company as an investment or tax shelter to your clients, another opinion as to the legitimacy of the business purpose is warranted.
Also, if you received a notice from the IRS, simply stopping additional funding into the captive insurance company or investment plan in the captive insurance company does not solve the problem. This is because you are continuing to receive a tax shelter for the money already invested. An IRS notice is definitely cause to seek counsel and an experienced CPA.
If you have any questions about captive insurance companies please contact me at
Captive insurance companies are becoming more widespread in business today.  We see captives being used to save businesses money by reducing premiums, they have been used in asset protection plans, and they have been used as tax shelters.  Just what is a captive insurance company?

In its essence and simplest form, a captive insurance company is a wholly owned subsidiary of a parent company.  The parent company pays premium to the captive that would otherwise have been paid to an outside insurance company.  The captive then covers the claims made against the parent company.  This is the self-insured use of the captive that large companies have used for many years.  Most major companies and universities have formed their own captive.  Today, captives can be much more diverse and do not have to be owned by one parent company.

When used as insurance, the idea is that the parent company benefits from the good performance of the company rather than the outside insurance company.  If the premium is $10,000, for example, and there is $5,000 in claims in a given year, the company will have a $5,000 surplus.  If, on the other hand, there is $15,000 in claims paid on that same premium there would be a $5,000 loss.  For this reason, most captives will purchase reinsurance or excess insurance to cover claims in excess of a certain amount.  Alternatively, some captives have reserves that have grown large enough over the years that they can absorb such losses.

In 2002, the IRS issued guidance on how to establish a captive in compliance with the tax code.  This allowed many smaller companies to save money by establishing captives.  For instance many companies have formed captives to administer their health insurance.  This has also opened the door for other legitimate uses by smaller companies.  In addition, several companies and/or individuals can get together and form a captive of their own.

When marketed as an investment vehicle or asset protection device, the fact that a captive can potentially reduce income taxes and be transferred estate tax free to heirs are strong selling points.  However, the idea behind the captive is not to use it solely as an investment or asset protection vehicle.  My firm can assist you to form a captives for companies to insure against potential risks.  The IRS does look for abuses such as a captive that insures for a risk that the parent company does not have.

If you are considering a captive you will want to consider how it will be established and run.  You should have an attorney, CPA, and actuary who are familiar with the process during the formation.  There are companies that, for a fee, will administer the insurance program for you.  You must be prepared to handle claims and comply with insurance regulations, so having an experienced administrator is important.  There are also companies that will adjust your claims and handle the entire claims process.  No company should do this on their own.

Additionally, when considering a captive you need to determine which risks you wish to insure.  You may only want to cover health insurance or maybe worker’s compensation.  Also, a benefit of a captive is that you may be able to insure more than traditional insurance would insure if you choose to do so.  Many traditional insurance policies have exclusions that prevent a recovery and you do not have to write those into your own policy.  Waiting periods and caps can be changed to suit your preference and potentially cover your true business loss.

There is a strong potential for abuse through misuse of a captive.  They are subject to audit but the IRS does not audit a large percentage of the captives that currently exist. However, that may change as the IRS continues to look closer at captives.  Therefore, it is important that the company be set up and administered properly.

If you have any questions about captives please contact me at

Tax Exempt Organizations need to be aware of the changes to the new 990 which was released on January 24, 2012.  Here is a link to the 2011 990 and the instructions The first two pages of the instructions provide information about the “significant changes”. 

One very important change that all organizations must be aware of is that you can no longer say “yes” to question 11a on the 990 if the 990 form was made available upon request of the board members.  In order to answer “yes” the board will have to be provided the document.   Obviously the idea is that the board should actually review the 990 and be aware of its content before the 990 is filed.

There are changes concerning entities with foreign investment greater than $100,000, board chair compensation and compensation of officers and employees, net losses and contributions.  There are other changes that affect joint ventures, investment partnerships and hospitals as well.  The instructions now provide more guidance in areas that were lacking.  Other minor changes include instructions that an orginization must make reasonable efforts to obtain information from third parties and paid preparers must enter their PTIN but may sign with a rubber stamp, mechanical device or computer software program.  For more information and to see all the changes review the forms and instructions.

The 990 (or 990-EZ) is generally required by the IRS to be filed for tax exempt organizations.  Which form is required is generally determined by the amount of gross receipts or assets of an organization.  Please have a qualified CPA assist your organization in the completion of the return.