The goal of the deal is to ensure tax payment plus interest in exchange for dropping the case.
The I.R.S. has offered small insurance companies under tax avoidance scrutiny a way to avoid penalties through a new offer. This offer would give the insurers the opportunity to pay all outstanding back taxes – in addition to interest – in order to close their cases and face no further penalties.
The Internal Revenue Service is working to help to correct the tax avoidance and prevent it in the future.
The small insurance companies are a specific group of taxpayers. They are taxpayers with captive insurance, which is designed to provide businesses with a way to insure themselves against risks that aren’t typically included in standard coverage. Known as captives, these taxpayers have managed to create a tax avoidance incentive. The I.R.S. offer is meant to incentivise paying the taxes instead of avoiding them.
It’s possible for captives to be devised in a way that the associated risks would make it most likely that they would never need to make a claim. The premiums would then be returned to the business owners or their heirs either with low taxation or without paying any taxes. This type of strategy has become popular among owners of small insurers who view this type of coverage as a way to reduce their income and estates taxes without much risk of having to pay for claims.
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There have been many different versions of captives among the small insurance companies under scrutiny.
For example, one New York Times report described one captive created by a dentist. That captive was designed to insure the dentist’s office against terrorist attack. Another captive described by the same report was made by a jeweler in Phoenix to cover against radioactivity damage from a dirty bomb or from nuclear waste. Clearly, the risk associated with any of those events impacting those businesses is quite low.
The type of deal the I.R.S. is offering to the small insurance companies is unique despite the fact that deals are regularly cut with taxpayers. What makes this one unique is that it targets business owners with a high net worth who have specifically created captive insurance companies for tax avoidance.