Artex Risk Solutions, Arthur J. Gallagher’s (AJG) Bermuda based alternative risk division, has confirmed it is involved in the US Internal Revenue Service (IRS) investigation into the 831(b) micro-captive industry.*
*reprinted from the 9-9-2014 article in www.CaptiveInternational.com
The investigation relates to captives that use the tax code 831b, which means they have less than $1.2 million in annual written insurance premiums and have elected to pay tax only on investment income. They pay no tax on their underwriting profits.
David McManus, president of Artex Risk Solutions, confirmed to Captive International that an investigation is ongoing and believes it involves quite a number of other captive managers who specialise in 831b captives and that it will likely spread to others.
McManus said: “We have already communicated with our small captive customers and referral partners on this and it’s really no surprise that Artex, as one of the largest captive managers in the world, is involved. The IRS clearly recognises captives as a legitimate tool for businesses, when used correctly and Artex believes that its small captive formation and management activities are lawful and will withstand IRS scrutiny. Like all industries, the captive marketplace continues to evolve and in the end of the day if this investigation drives out abuses the industry will only emerge all the stronger and better for it.”
The IRS has upped the number of investigations in this area. Alex Webb, chairman of the North Carolina Captive Association and partner at Webb & Coyle, told Captive International recently that the increased frequency of audits, particularly of captives domiciled in offshore jurisdictions, is driving a sense of anxiety in the captive management community. Some managers have expressed concerns around FATCA and the possibility of being audited simply for existing offshore.
Speaking during the Insurance Companies session of the American Bar Association Section of Taxation meeting in Phoenix earlier this year, Sheryl Flum, branch chief, IRS Office of Associate Chief Council, insisted that the IRS has no intention of shutting down the captive insurance industry.
Flum said: “Most Fortune 500 companies have captives, and now with section 831(b), a lot of middle-market and closely held companies are forming captives. Given this environment of proliferation of captives, we are seeing an uptick in IRS interest in captives. The government is trying to walk a very thin line here because we are not trying to chill legitimate captive entities. We recognise that in a lot of cases, there are small businesses where it makes a lot more economic business sense to do self-insurance through a captive and then do a pooling arrangement.”
Note from Captive Experts:
Read our earlier IRS captive tax audit alert post which gives a broader view on this issue. We believe the IRS will find and make examples of captive management firms whose design, formation and management practices have defects. This will prove good for the small captive insurance company industry longer term. It will provide additional needed guidance from the IRS, and will cause widespread improvements in industry practice standards and procedures.