The Internal Revenue Service (IRS) and Congress have launched campaigns to investigate small (or "micro") captive insurers in recent months. According to law firm Duane Morris, a number of advisors, accountants and estate planners have been using micro-captives to benefit from tax and estate planning purposes, instead of using them for their intended risk management purposes.
On the surface, these micro-captives still present risk management as part of their benefits. However, these captives have been structured so that the tax and estate planning aspects completely overwhelm the insurance aspects, Duane Morris claims. This practice has not gone overlooked by the IRS and Congress.
On Feb. 3, 2015, the IRS included micro-captives on its "Dirty Dozen" list. In a release addressing "Abusive Tax Shelters on the IRS 'Dirty Dozen' List of Tax Scams for the 2015 Filing Season," the IRS explains in detail the fraudulent practices of these micro-captives:
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