VCIA Letter Addresses IRS Treatment of Micro-Captives

The Vermont Captive Insurance Association (VCIA) has spoken out about the US Internal Revenue Service's (IRS) recent treatment of micro-captives.

In a letter to US Treasury Secretary Steven T. Mnuchin and IRS Commissioner Charles Rettig, Richard Smith, president of the VCIA, refers to a March 20, 2020, letter from the IRS sent to those in the captive industry involved with micro-captives. The letter, Mr. Smith said, "raises serious concerns about the tactics of the IRS."

"The March 20th IRS letter came at a time of extraordinary circumstances as every organization, including the federal government, is struggling to endure the pandemic crisis we now face," Mr. Smith wrote. "Insureds need their insurance coverages to protect them in the struggling economy and the letter's intimidating and draconian questioning regarding the legitimacy of the small company insurance industry is insensitive at best."

Mr. Smith said that the VCIA is aware of concerns at the IRS that some entrepreneurs might be using micro-captives for purposes other than insuring their owners' risks. "The IRS has rightfully gone after such 'microcaptives,'" the letter states. The VCIA president noted, however, that hundreds of small insurers are engaged in providing legitimate insurance, saying "the industry should not be indicted with a broad brush as the IRS letter does."

More helpful than such letters, Mr. Smith said, would be IRS regulations or guidance clarifying issues surrounding the 831(b) tax election. He notes that Congress recognized the importance of supporting small insurance companies by enacting section 831(b) of the Internal Revenue Code and recently reaffirmed its support by raising the premium volume allowed to make an 831(b) election to $2.2 million from $1.2 million and indexing the amount going forward.

"We request that the IRS withdraw this letter and suspend its audit activities of 'microcaptives' until the COVID-19 crisis is over and the nation's economy is on the road to recovery," Mr. Smith said. "We also request that the IRS, when it resumes it examination of 'microcaptives,' take a more appropriate approach focusing on those organizations that show evidence of malfeasance, and not to condemn an entire industry."