From the Tax Law Offices of David W. Klasing - The IRS is Targeting the Illegal use of Micro-Captive Insurance Companies in 2020 for Civil and Criminal Tax Enforcement

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Tax Law Offices of David W. Klasing, PC

Jul 16, 2020, 06:37 ET

IRVINE, Calif., July 16, 2020 /PRNewswire/ -- One of the new tax-avoidance schemes that has begun to appear with more and more regularity in the last decade is the creation of micro-captive insurance companies to claim tax deductions involving exorbitant premiums. The IRS has cracked down hard on this type of tax shelter scheme, sending letters out in late 2019 to hundreds of taxpayers they believed were fraudulently using micro-captive insurance to avoid taxes and offering them a possible way back into compliance without the risk of criminal tax prosecution.

Why you should use an Attorney to represent you in an audit

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According to the IRS, warning signs that might lead to an investigation include the following: "(1) the coverage involves an implausible risk, (2) the coverage does not match a business need or risk of the insured, (3) the description of the scope of the insurance coverage is vague, ambiguous, or illusory, or (4) the coverage duplicates coverage provided to an insured by an unrelated, commercial insurance company, and the policy with the commercial insurer has a far smaller premium." Furthermore, agents will often look to see if the claim process was either severely lacking or nonexistent to tell if actual insurance underwriting is occurring.

The IRS recently began to offer a life raft to those who know they may be in violation of micro-captive related fraud. In the fall of 2019, the IRS sent out hundreds of letters to taxpayers placed under audit for suspected fraudulent activity related to micro-captive insurance schemes. The letters offered a settlement to these taxpayers. Terms of the deal include making full disclosure, cooperating fully with the IRS, including a potential promoter investigation who sold you the captive idea in the first place, and that only a 10% deduction for insurance premiums under the plan will be permitted, with the other 90% deduction being disallowed. Other fines and penalties are also likely to be assessed. Only a skilled, experienced tax attorney like those at the Tax Law Offices of David W. Klasing can help you determine whether such a deal is right for you without becoming a potential witness against you under the attorney client privilege.

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC