The IRS continues its crackdown on abusive “micro-captive transactions.” The tax agency is establishing 12 new examination teams that are expected to open audits related to large numbers of taxpayers in coming months. A micro-captive transaction is one in which a related group of taxpayers attempt to reduce their aggregate taxable income using insurance contracts. Each insured entity under the contracts claims deductions for premiums for insurance coverage, and the captive insurance company elects to be taxed only on investment income, which results in the premium payments being excluded from its taxable income. Abusive micro-captives have been a concern to the IRS for several years.
