On 1/31/20, the IRS published News Release 2020-26, describing the next steps on its plan of action against abusive micro-captive transactions.
In IRS News Release 2019-157 (issued on September 16, 2019), the IRS announced a structured settlement for certain taxpayers with micro-captives under audit in IRS Exam. Under the Micro-Captive Settlement Terms a taxpayer’s election was considered a “non-binding consent to participate in the resolution” with the formal agreement to be memorialized with a Closing Agreement. Thus, under the Settlement Terms, an electing taxpayer would not be bound to the settlement until executing the Closing Agreement.
In the recent News Release 2020-26, the IRS announced that “nearly 80% of taxpayers who received offer letters elected to accept the settlement terms.” This statement is misleading, as it really means that nearly 80% of the taxpayers who received offer letters elected to participate in the program in order to consider the settlement. To date, few if any taxpayers have actually signed closing agreements. Time will tell as to whether those who have elected to participate in the program will actually accept its terms.
Also, the IRS announced “the establishment of twelve new examination teams that are expected to open audits related to thousands of taxpayers in the coming months.”
The unstated meaning of this News Release is the IRS perception that taxpayers are accepting the settlement terms because they know they will lose in Court, and the IRS intends to open thousands of more audits on taxpayers who are still participating in captive transactions.
Taxpayers who have participated in captive transactions in the last several years are advised to seek counsel as to the qualified status of their captive. In particular, taxpayers should make sure that they have been filing IRS Forms 8886 with every tax return that includes a tax consequence of the captive. For more information about captive pre-audit screenings, captive audit representation and preparation of IRS Forms 8886, contact Michael Lloyd at firstname.lastname@example.org and by phone at (412) 454-0225.
 Mike Lloyd has represented taxpayers with respect to captive transactions in IRS Exam, Appeals and Tax Court. He is currently settling cases in Exam under the IRS Initiative and in IRS Appeals. He has prepared more than 1,000 IRS Forms 8886.