The IRS’ List of “Abusive Tax Schemes”

The Feldman Law Firm LLPThe Feldman Law Firm, LLP

Re: The IRS' List of "Abusive Tax Schemes"

February 10, 2015 (HOUSTON, TX) - In the first quarter of each year, the IRS increases the volume of its press releases in a thoughtfully designed program to spur taxpayer compliance with our income tax system. This is a well-reasoned effort by the IRS.

As part of this program, the IRS identified the following obvious concerns in 2011 - 2014:

  • Hiding income offshore (2011)
  • Identity theft and phishing (2011)
  • Return preparer fraud (2011)
  • False or misleading forms (2011)
  • Frivolous arguments (2011)
  • Nontaxable Social Security Benefits with Exaggerated Withholding Credit (2011)
  • Abusive retirement plans (2011)
  • Disguised corporate ownership (2011)
  • (Falsely) Zero wages (2011 and 2013)
  • Misuse of trusts (2011)
  • Fuel tax credit scams (2011)
  • “Free Money” from the IRS & Tax Scams Involving Social Security (2012)
  • False/Inflated Income and Expenses (2012)
  • False Form 1099 Refund Claims (2013)
  • Falsely Claiming Zero Wages (2013)
  • Abuse of Charitable Organizations and Deductions (2013)
  • Impersonation of Charitable Organizations (2013)
  • Pervasive Telephone Scams (2014)
  • False Promises of “Free Money” from Inflated Refunds (2014)

In January 2014, the Service also included certain “Abusive Tax Schemes” using sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. The Service explains:

"The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets."

Echoing a theme long sung by Capstone and The Feldman Law Firm LLP, last week the IRS added abusive captive insurance arrangements in IR-2015-19 (February 3, 2015). The IRS noted that captive insurance is a legitimate tax structure. In the abusive version of the structure, "underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient." The IRS continues: "The promoters assist with creating and ‘selling’ to the entities often times poorly drafted 'insurance' binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant 'premiums,' while maintaining their economical commercial coverage with traditional insurers."

We at Capstone and the Firm have seen - and in fact have rehabilitated - poorly designed or run alternative risk planning arrangements. We've long maintained that captive/alternative risk planning is highly sophisticated business planning that should only be carried out by experienced professionals (tax, insurance regulatory, insurance coverage and corporate lawyers) with substantial experience in these areas. Instead, we see people lacking the requisite expertise engaged in this type of planning. Promoters will engage in such activities while denying that they are providing any tax, legal or other professional services. We see these businesses charging $30,000+ a year for clerical services with "policies" copied from a form book.

We join in the call for domiciles to strictly license those engaged as "captive managers" rather than looking the other way when tax shelter promoters are licensed by the states as "captive managers" and elected to the board or as presidents of their associations.

As we've seen in handling more than CAPTIVE_FORMATIONS captive projects since 1998 and in more than TAX_CONTROVERSIES substantive reviews by the IRS, when implemented and operated correctly, a captive insurance company can help middle market companies manage the risks of their operating businesses, supporting the commercially available coverages.

If you currently have a captive insurance company and would like a comprehensive review of your captive program, The Feldman Law Firm LLP in joint venture with Capstone (and joined in by its team) is now offering a Captive Health Checkup. Attorneys and insurance professionals specializing in alternative risk planning will examine the key aspects of a client’s existing program for weaknesses and irregularities.

If you are interested in learning more about captive insurance companies and alternative risk planning or Capstone's 17-year track record in forming and operating captives, please contact a member of its executive team or complete the short form below.


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