Insights Magazine Volume IX - Page 25

requirements, which are to be reported on Form 8918, “Material Advisor Disclosure Statement.” concerned with the following areas: • Are the premiums paid to the captive determined on an arms’ length basis and with a supporting underwriting or actuarial analysis? • Do the payments made to the captive greatly exceed what is commercially reasonable for the given coverages? 1. How the taxpayer became aware of the captive insurance transaction • Are the ri sks covered implausible? 2. Whether the filings are being made because the captive’s loss ratio was less than 70 percent, it made related party loans, or both reasons • Is there a business need for these coverages? • Do the coverages duplicate those obtained in the commercial marketplace? 3. Where the captive is domiciled • 4. A description of each type of coverage issued by the captive and for which years When the insureds incur losses, do they file claims with the captive? • 5. A description of how the premiums were calculated for the years in question, including the name and contact information for any actuary involved in the pricing Does the captive have sufficient capital for the risks it is insuring? Doesn’t the IRS already have this information? What information is required to be disclosed and when are the disclosures required to be filed? Pursuant to the Notice, the following must be disclosed to the IRS: 6. A description of any claims paid by the captive, as well as any loss reserves reported by the captive 7. A description of the assets/investments held by the captive Form 8886 also requires a description of the tax benefits involved with the transaction, the material advisors to the transaction, as well as a listing of any related parties involved. The Notice originally required these disclosures to be made by January 30, 2017. After requests from organizations such as the Self-Insurance Institute of America as well as a member of the Senate Finance Committee, the IRS extended the filing deadline to May 1, 2017. Under the terms of the Notice, transactions entered into on or after November 2, 2006, need to be considered, and disclosures need to be made for the five most recent tax years. If the captive has been in existence less than five years, the disclosures should be completed for each year of the captive’s existence. Why is the IRS asking for this information? According to the Notice, the IRS is requesting this information in order to determine which characteristics of the 831(b) captive arrangements are indicative of “tax avoidance or evasion.” Amongst others, the IRS is The IRS actually receives most of the information being requested annually when the captive files its tax return. The annual report or statement required to be attached to the tax return generally contains information regarding lines of business, losses incurred, the domicile of the captive, as well as investments and other assets held by the captive. For the several hundred captives currently under examination, the IRS has obtained extensive documentation with regard to all aspects of the captive, its formation and its operations. This approach is not unusual, however. When the IRS begins an examination, generally their very first request is for copies of the tax returns for the years being audited. What are the consequences of not filing? Penalties will be assessed if it is determined that a taxpayer was required to disclose their participation in a reportable transaction but did not. The penalty is 75 percent of the amount the tax decreased by participating in the transaction, with a maximum penalty of $10,000 for individuals and $50,000 for other taxpayers. The penalties are essentially a “strict liability” penalty, meaning it is only in the rarest circumstances this penalty will be abated. As seen in Captive Insurance Times 23