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 firstname.lastname@example.org.