Captive Insurance Company IRS Audit Defense

The IRS recently stated:


The Treasury Department and the IRS recognize that related parties may use captive insurance companies that make elections under § 831(b) for risk management purposes that do not involve tax avoidance, but believe that there are cases in which the use of such arrangements to claim the tax benefits of treating the Contract as an insurance contract is improper.

Treasury Notice 2016-66


How to protect yourself from a Captive Insurance Company audit

The primary purpose of an effective Captive Insurance Compnay examination defense is to know what the IRS is looking for and to get out in front with the most helpful facts and an narrative that show that while mistake may have been made, the use of a Captive Insurance Company was not just for tax avoidance, but rather as part of an overall risk management strategy, thus its use is legitimate and shold be allowed.


Common captive insurance audit mistakes to avoid


  • Too often taxpayers believe they can stonewall the IRS and that the best defense is to play “hide the ball.” We have seen the results of these and it is not pretty. In the absence of an explanation, the IRS will assume the worst case. Your silence may be used against you.
  • Too often care is not paid to the vast technical requirements. Yet, taxpayers will mistakenly assume a case is hopeless after a technical mistake is revealed! This is not true.
  • Believing the IRS examiner or exam team is the final word. An examiner is not the final word. The Examiner’s group manager is not the final word. The IRS Office of Appeals is not the final word.
  • Believing the IRS has endless resources. The IRS routinely conducts “risk assessments” to make sure that they resources they devote to an audit will be well worth it. If the IRS feels the cost of the exam is high relative and the chances of an high assessment is low, the IRS may decide not to complete the exam.  
  • Thinking the IRS does not makes mistakes all the time. Their mistakes are understandable. The tax code is too complicated for anyone person to fully understand let alone a compartmentalized examination “hammer” that is specifically trained to look at every captive insurance transaction as a “nail.”


Parent & Parent LLP could be the right team for you

We are experienced in successfully representing US taxpayers and thier businesses around the globe — all of whom were operating under stressful situations. Your current tax team might not have the necessary firepower to present a compelling audit defense. Our tax attorneys, CPAs, and tax specialists are experienced in winning difficult cases, even where our client did not do everything right, and might have some other issues. Contact us at 888-477-4258 or info@irsmedic.com to discuss your present concerns — all protected by the attorney-client privilege.