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Bloomberg Quotes Rachel Partain on Micro-Captive Insurance

August 13, 2019, Bloomberg Law

The IRS’s legal battle against one of its “dirty dozen” tax scams is still young, but early victories for the agency have some wondering if a large-scale settlement is on the horizon.

. . .

There were rumblings that the IRS was working on a settlement initiative as far back as two years ago but that initiative never materialized, said Rachel L. Partain, a member of Caplin & Drysdale, Chartered.

Past global initiatives, resulting from the IRS’s crackdown on tax shelters popular in the 1990s—like the 2004 “Son of Boss” settlement program—could provide clues to how the agency might craft a future micro-captive settlement deal.

But Partain said she suspects such a program has been delayed because micro-captives are so “factually specific.”

The IRS in its 2018 “Dirty Dozen” list identified the many ways in which micro-captive structures can fall short of a proper insurance arrangement. It notes transactions where “coverages may insure implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages” as just a few that raise alarms. The arrangements also made the agency’s 2019 list of top tax scams.

For the the cases currently docketed at the Tax Court, it is likely attorneys in the IRS Office of Chief Counsel will push taxpayers toward individual settlements specific to their facts, Partain said.

Even so, she said a global settlement could be possible, despite the challenges. In theory, the IRS “could try to draw distinctions such as, ‘If you have 3 of the following 5 facts, then you get a 20% penalty; if you have less, then you get a 10% penalty,’ and then they can use whichever facts they have determined to be more problematic,” she said.

. . .

“Ultimately, I’m optimistic that a taxpayer will win,” Partain said. “But I think it’s going to take a while for that to happen.”

For the full article, please visit Bloomberg Law’s website (subscription required).

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