The Coronavirus pandemic has not slowed the Internal Revenue Service’s campaign with respect to micro-captive insurance companies. Following an announcement from Commissioner Rettig that the Service would be deploying additional Exam groups focused on captive insurance, the Service has begun issuing the “Letter 6336” to what appears to be a great number of captive insurance company owners.
These letters request that captive participants consider voluntarily amending their returns to remove captive insurance deductions. This letter serves as what the IRS calls a “soft” letter, which stems from the IRS LB&I function labeling micro-captive arrangements as one of its early Compliance Campaigns back in January 2017.
The newly implemented IRS Letter 6336 is being sent to a wide array of taxpayers who previously disclosed participation in a Micro-Captive Insurance transaction under section 831(b) of the Internal Revenue Code by reason of the Transaction of Interest Notice 2016-66. The letter requests that taxpayers respond to the IRS with the following:
- The last tax year in which the taxpayer took deductions for the payment of captive insurance premiums;
- The date when the taxpayer ceased participating in the micro-captive insurance transaction (if applicable); and
- A signed “penalties of perjury statement” declaring that the recipient of the letter has read the entire document, and all statements are true and correct.
Failure to respond, the letter states, may result in the file being sent to examination (with a gentle reminder that underpayments are subject to interest and penalties).
The letters are consistent with the IRS views on captives and are going to a wide variety of captives. Within our practice we have seen many receive these letters, including those not under exam, those already under exam, those who are in the process of resolutions in Appeals and those in litigation. A wide net indeed.
From my experience, this letter program is intended to drive decisions by captives as to continued operation and likely is part of the classification process to determine who is in the next wave of captive insurance companies to go under examination. We do not know the number of such examinations (the IRS seems unlikely to be able to audit all), but we have a very good idea of what the IRS is looking for as it determines who to examine. As advised by even the IRS in the letter, it would be wise for the recipients not to ignore the 6336 letter and to consult tax counsel on the appropriate course of action, as well as to have counsel assess the readiness of the captive and related documentation if the IRS comes calling.
If you have questions about captive insurance or any other tax matter, contact alliantNational’s National Director of Tax, Steven Miller, at [email protected].