Offshore Financial Arrangements Including Micro-captives Still On Watch List
Most micro-captives are a legitimate way to offshore the self-insurance of Workers Compensation benefits. The IRS released its list of the Dirty Dozen for 2018 a few months ago. Offshore financial arrangements filled the #12 of 12 spots.
Micro-captives, better known as 831(b) Captives were unfortunately heavily abused for many years. In fact, some of the owners issued themselves debit cards to draw the money out tax-free. Such tax abuses immediately caught the watchful eye of the IRS. I learned of such abuses at a previous CICA Conference in Orlando.
The maximum amount limit on 831 (b) Insurance Captives was lifted to $2.3 million for 2018. Could an offshore micro-captive provide enough protected capital to finance the handling of a group of Workers Compensation claims? Yes, the program would be viable. However, $2.3 million can easily be expended with just a few claims.
Aggregate reinsurance would be needed if the claim payouts reached the $2.3 million maximum. Some micro-captives have even re-insured themselves with another micro-captive. One has to be careful when stacking one captive on top of another to re-insure of the captives.
Please see the list of the IRS’s Dirty Dozen for 2018 below:
- Phishing
- Phone Scams
- Identity Theft
- Return Preparer Fraud
- Fake Charities
- Inflated Refund Claims
- Excessive Claims for Business Credits
- Falsely Padding Deductions on Returns
- Falsifying Income to Claim Credits
- Frivolous Tax Arguments
- Abusive Tax Shelters
- Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. IR-2018-64)
An excerpt from the above link is below:
Hiding Income Offshore Using Micro-captives
Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. They then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward to voluntarily disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations.
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The above passages should not discourage any legitimate Workers Compensation Micro-captive from being formed and used to cover claims. Recently, Congress even redefined some of the 831 (b) captive arrangement rules to remove any ambiguities.
Most offshore domiciles/jurisdictions want you to input at least $250,000 upfront to begin a micro-captive. One large differentiation among the domiciles is the expenses charged to set up an 831 (b) captive.
Please note that I am not referring to onshore domiciles.
I do not tout myself as a captive expert. However, I have facilitated the runoff claims for two failed captives over the last few years. From the claims end, I have learned what to and not to do with the financing and claims handling of micro-captives.
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