IRS Includes Foreign Captive Insurance on 2022 "Dirty Dozen" List

The US Internal Revenue Service (IRS) has issued the first installment of its 2022 "Dirty Dozen" list of potentially abusive tax arrangements, with foreign captive insurance arrangements included on the list.

In a statement, the IRS said the focus of its first group for its 2022 Dirty Dozen is "four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetized installment sales."

The IRS advised taxpayers to avoid the arrangements.

The IRS said that in the Puerto Rican and other foreign captive insurance arrangements it included on the list, "US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the US owner has a financial interest." Characteristics of the arrangements include one or more of covering implausible risks, non-arm's-length pricing, and lack of business purpose for entering into the arrangement, the IRS said.

In the statement, IRS Commissioner Chuck Rettig said that all four of the transactions on its initial list are potentially abusive, adding that they are on the agency's "enforcement radar screen."

"Taxpayers who have engaged in any of these transactions or who are contemplating engaging in them should carefully review the underlying legal requirements and consult independent, competent advisors before claiming any purported tax benefits," the IRS statement said. "Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, such as filing an amended return and seeking independent advice."

After a year's absence, abusive micro-captive arrangements returned to the IRS's Dirty Dozen list in 2021.

The IRS said that, in the coming days, it would announce the remaining eight potentially abusive arrangements on this year's list.