By Steven Miller, alliantgroup National Director of Tax and former IRS Acting Commissioner

The IRS has completed its annual list of the “Dirty Dozen” tax scams of 2016. The scams that were included in 2016 are (1) identity theft, (2) phone scams, (3) phishing, (4) return preparer fraud, (5) offshore tax avoidance, (6) inflated refund claims, (7) fake charities, (8) falsely padding deductions and returns, (9) excessive claims for business credits, (10) falsifying income to claim credits, (11) abusive tax shelters and (12) frivolous tax arguments. In IR-2016-25, the IRS specifies two types of “abusive tax shelters,” misuse of trusts and captive insurance. 

This is not the first time small captive insurance companies were included in the Dirty Dozen List. They first appeared in 2015 and the repeat posting was no surprise as the IRS continues to pursue many captive insurance and captive management companies. 

The two IRS listings are similar, but there are a couple of differences. First, the IRS makes a correction to their 2015 posting. In 2016, the IRS states that the insurance company is “taxed only on its investment income,” as opposed to “taxed only on the investment income from the pool of premiums,” which they said in 2015. They also widen the scope of potential targets of interest in 2016 when they add accountants or wealth planners to the group of “unscrupulous promoters” that “persuade” owners of closely held entities to participate in captive insurance abuses. 

Another significant change for taxpayers is the mention of the Protecting Americans from Tax Hikes (PATH) Act of 2015. As we have blogged previously, the PATH Act increased the amount of premiums that can be received by a small captive. The new law also added some restrictions aimed at curbing certain estate tax planning. The 2016 Dirty Dozen discussion lets people know that the IRS still sees abuses outside of the estate tax area.

While the IRS continues its work, it is important to remember that captive insurance companies are created as part of the Internal Revenue Code. When done right, they are a valuable tool for a small business to manage its risks. alliantgroup represents numerous captives, whether they seek help to ensure compliance or whether they are in IRS audit.

Steven Miller is alliantgroup’s National Director of Tax and the co-leader of alliantNational, alliantgroup’s national practice. alliantNational provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help taxpayers receive timely and precise guidance on all their tax matters. Contact us today for more information on this and other topics.