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Tax Shelter Settlements Show Strength of IRS Position, Desmond Says (1)

Jan. 31, 2020, 8:49 PM; Updated: Jan. 31, 2020, 10:58 PM

The IRS is thinking broadly about how to resolve remaining cases involving abusive insurance schemes, its top lawyer said after the agency announced the results of a settlement deal tied to the transactions.

The agency in 2019 offered a settlement to a limited number of taxpayers who participated in “micro-captive” insurance arrangements—schemes involving small insurers that can choose to pay tax only on their investment income under a perk in the tax code. The IRS has stated (Notice 2016-66) that the deals have the potential for tax avoidance or evasion, and said taxpayers involved must disclose the transactions.

Nearly 80% of those who received the offer accepted the settlement, the IRS announced Friday.

That high acceptance rate “shows we prevailed in three of three cases in Tax Court and people see the writing on the wall,” IRS Chief Counsel Michael Desmond told Bloomberg Tax.

The IRS announced the settlement offer following victories at the U.S. Tax Court in Syzygy Insurance Co. v. Commissioner, Avrahami v. Commissioner, and Reserve Mechanical Corp. v. Commissioner.

It also shows that individuals decided that the terms of the settlement were more advantageous than continuing to fight the IRS, according to Michael A. Villa, a partner at Meadows, Collier, Reed, Cousins, Crouch, and Ungerman LLP in Dallas. Villa said defending the merits of a transaction can be time-intensive.

Thousands of Investigations

Cracking down on micro-captives has long been a main enforcement priority for the IRS: The transactions have appeared on the agency’s annual “Dirty Dozen” list of tax scams since 2014.

The agency still has a number of active micro-captives cases, some of which will be settled and others that will proceed to trial, Desmond said Friday on the sidelines of an American Bar Association meeting in Boca Raton, Fla. There is also a “very large inventory of cases still in exam and not yet in exam,” he said.

“There’s broader thinking strategically about what to do and how we’ll resolve these cases long-term,” Desmond said.

The IRS Friday said it will significantly increase enforcement in the area, creating 12 teams of auditors to carry out audits of thousands of taxpayers.

The agency’s strategy is transparent: There’s a good offer on the table and people who haven’t already taken it can expect problems, said Brian C. McManus, a partner at Latham and Watkins LLP in Boston focused on tax controversy.

” I think it spells big trouble for those people and I think it’s a last-minute warning shot to come in for anyone that’s still on the fence about it,” he said.

(Updates with additional comment starting in 11th paragraph. )

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Rachael Daigle at rdaigle@bloombergtax.com

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