Abusive Tax Shelters on IRS’s “Dirty Dozen” List (IR-2017-31)

CCH Tax Day Report

The use of abusive tax shelters and structures continues to be a problem and is on the IRS’s annual list of “Dirty Dozen” tax scams for the filing season. The list describes a variety of common scams that peak during the filing season as taxpayers prepare their returns. Most recently, the IRS highlighted abuses of rules for micro-captive insurance companies.

Tax law generally allows certain very small property and casualty companies to elect special tax treatment. These companies are referred to as captive insurance companies because they are often formed only for the purpose of insuring the risks of affiliated companies. In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance.

In Notice 2016-66, I.R.B. 2016-47, 745, the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated these transactions as “transactions of interest.”

“Taxpayers should avoid unscrupulous promoters who encourage the use of phony tax shelters designed to avoid paying what is owed,” said IRS Commissioner John Koskinen. “These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place.”

IR-2017-31

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