The Treasury Department and the IRS believe micro-captive insurance structures have the potential for tax avoidance or evasion. In order to gather more information on these transactions the IRS is requiring “Participants” to file Form 8886 by May 1, 2017 with the Office of Tax Shelter Analysis. “Participants” include: (A) any person who directly or indirectly owns an interest in an “Insured “entity conducting a trade or business, (B) the Captive, (C) the Named Insured. Attribution rules under IRC §267(b) and IRC §707(b) apply.

Form 8886 is also required to be filed with participant’s tax return. For example both the company paying insurance premiums to micro-captive and the company’s shareholders will be required to file Form 8886.

Penalties for failure to report:

(1) 75% of the decrease in tax as shown on the return,

(2) Minimum penalty of $10,000 ($5,000 for a natural person),

(3) Maximum penalty of $200,000 ($100,000 for a natural person)

Please consult Donald C. May or one of our other tax professionals to discuss the filing of Form 8886.