By Sandra Fenters

On March 20th, just four days after the National Covid-19 Emergency was declared, The IRS sent 150,000 letters to captive insurance companies who take the 831(b) election.

This memo was clearly designed to ignite fear in the minds of captive insurance owners.  It’s yet another scare tactic in the Services’ bullying efforts to induce doubt about the health and viability of captive insurance arrangements.

The timing for the IRS could not have been poorer. Despite presenting massive challenges to the global economy, the coronavirus pandemic may well be captive insurance companies’ finest hour. Last week a number of publications highlighted that high severity, low-frequency events like Covid-19 are when captive insurance shows its’ real value in protecting America’s small and mid-sized businesses from disaster.

SIIA Expresses Concerns about Ill-Timed Letters

The Self-Insurance Institute of America (SIIA) wrote to Treasury and IRS on March 30, calling the letters “insensitive and draconian.”

Ryan Work, SIIA VP of Government Relations who leads the SIIA Advocacy Committee on which I am very active, requested that the IRS reconsider its letter and its timeframes given the crisis.

Given the current crisis, combined with the timing and the burden being placed on small- and medium-sized businesses, the IRS should suspend further audit activity until the National COVID-19 Emergency Declaration is withdrawn so as to allow businesses operating captive insurance to mitigate the risks that Congress and the Tax Code allow them to appropriately address. Furthermore, while the deadline is suspended, the overall need for the IRS Letter itself should be reconsidered and information clarified as it is possible for the IRS to deduce the answers to its own questions from information that has already been reported by taxpayers who have complied with the requirement to file Form 8886 over the past two years.

Here is a link to the full SIIA letter to Treasury Secretary Mnuchin and IRS Commissioner Rettig.

We are hopeful that captive insurance companies play a pivotal role in covering losses in the coming months of the pandemic and that the IRS recognizes their critical and legitimate role in mitigating risk not properly covered by other insurance products.