IRS Declares War on Tiny Insurance Tax Dodging Schemes
Published Date: 1/14/2025
Rule
Summary
Starting January 14, 2025, the IRS is cracking down on certain micro-captive insurance deals by labeling some as 'listed transactions' and others as 'transactions of interest.' If you’re involved or advising on these deals, you’ll need to report them to the IRS or face penalties. This change helps the IRS spot tricky tax moves and keeps everyone playing fair.
Analyzed Economic Effects
3 provisions identified: 0 benefits, 2 costs, 1 mixed.
Certain micro-captive deals now reportable
Starting January 14, 2025, the IRS’s final rule identifies some micro-captive insurance arrangements as listed transactions or as transactions of interest. The rule uses named tests — the 20 Percent Relationship Test, a Financing Factor, and a Loss Ratio Factor — to describe which arrangements qualify for identification.
Reporting duty for participants and advisors
If you are a participant in one of the identified micro-captive transactions or a material advisor to such a deal, you must file disclosure statements with the IRS and the Office of Tax Shelter Analysis. The final regulations state these participants and material advisors are subject to penalties for failure to disclose.
Tests tightened and lookback extended
The final rule narrows which transactions are listed transactions by requiring that both the Financing Factor and the Loss Ratio Factor tests be met for listed-transaction identification. The final rule also lowers the Loss Ratio Factors compared to the proposal and extends the Transaction of Interest computation period to a period of up to ten years.
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