Captive Insurance Programs Under Scrutiny

Many of us have heard of captive insurance plans and have some level of familiarity with them.  In a nutshell, captive insurance plans involve a business forming its own insurance company as a risk management technique.  The basic premise which must be in place is that legitimate risks are being insured and the associated premiums are reasonably priced relative to those risks.  If bogus, aggressive risk pools are created and/or overpriced premiums are being charged, then the captive and all those associated with its formation may be at risk.  I have had conversations with a number of professionals in the business community over the past several months suggesting the IRS and other agencies will be significantly cracking down on abusive plans.

A business contact sent me this concise, one page article last week from the January issue of California Broker magazine.  




The author, Lance Wallach, puts forth some troubling news/information for those who have established a captive insurance plan which may be considered abusive as well as those who helped structure those plans (including the plan architects, insurance brokers, CPAs, etc.)  Mr. Wallach states in the article "...my office has been receiving over 50 calls per month from people that are being threatened with large IRS fines...Not all 412i, captive insurance and Section 79 plans are abusive, listed or reportable transactions, but almost all the Section 79 and captive insurance plans that I have recently seen are abusive...I have had phone calls from taxpayers that contributed less than $100,000 to a listed or reportable transaction and were fined over $500,000."    There is an IRS form, 6707A, which is used "to help detect, deter, and shut down abusive tax shelter activities...The IRS has fined hundreds of taxpayers who did file under 6707A.  They said that they did not fill out the forms properly, or did not file correctly."  Given Mr. Wallach's observations and experiences, if you (or a contractor you work with) are involved with a captive insurance program it may make sense to review the plan with professionals who are expert in this area to ensure you don't get penalized given the recent spotlight focused on captive insurance programs.

For more on this issue and to see Mr. Wallach's credentials, be sure to click on the link above to read the full article.  As always, reach out to your trusted advisors for guidance (or seek outside counsel if these advisors were instrumental in structuring your captive insurance program in order to get an outside opinion).