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
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