In January, the IRS announced that it would be significantly increasing enforcement activity around abusive micro-captive insurance transactions. In late March 2020, the IRS sent Letter 6336 (3-2020) to taxpayers it believes participated in micro-captive insurance transactions to kick off enforcement. Taxpayers had until June 4, 2020 (note: the May 4 original deadline was automatically extended) to respond to that initial letter. However, taxpayers were required to respond only if they were no longer participating in the micro-captive insurance transaction.
We are now seeing that the IRS is issuing a second round of these letters with the same language. The due date for a response to this second round of letters is September 14, 2020. Again, no response is necessary if you continue to participate in a micro-captive transaction. If you continue to participate in a micro-captive insurance transaction covered under Notice 2016-66, you should continue to file a protective disclosure on Form 8886 with your tax returns to disclose your participation. However, if you ceased participation in these transactions and did not respond to the first letter, please contact your tax advisor to assist with a response to this letter as soon as possible.
The timing of this second letter is interesting because the first letter indicates to keep disclosing the transactions on your tax return if you continue to participate in a non-abusive micro-captive insurance arrangement. However, the IRS is now sending a second letter before the 2019 extended tax returns are even due to allow you to disclose the transactions on your tax return.
Please note that the letter does not represent a notification of an audit or examination of the reinsurance company, dealership entity or individual to which the letter was directed. Rather, it is a request for information. The transaction identified in IRS Notice 2016-66 and the tax court cases cited in the letter do not necessarily describe your reinsurance company’s current transaction as we understand it.
We continue to believe that the F&I reinsurance arrangements utilized by auto dealers continue to comply with current tax laws and do not exhibit the characteristics determined to be abusive by the U.S. Tax Court in several decisions. This is the consensus within the auto dealer industry regarding the auto dealer micro-captive insurance transactions.
If you have any questions regarding your micromicro-captive insurance, please contact our tax advisors.
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