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IRS offering limited settlement to some taxpayers under audit

The Internal Revenue Service (IRS) does not have a reputation as being particularly forgiving. Some taxpayers currently under audit, however, are getting an uncommon opportunity: a limited-time settlement offer that will bring some finality to the issue at-hand.

Here is a brief explanation of who might be eligible for the settlement – and what you should keep in mind before making a decision.

Micro-captive insurance

The focal point for the IRS’ settlement offer is taxpayers who are under audit for participating in a micro-captive insurance program. A captive insurance company, Bloomberg explained in a recent report, is a way for an operating business to insure risks they may not be able to otherwise. A business that makes $2.3 million or less in income qualifies for micro-captives, and in these cases are only taxed on their income.

In general, tax laws allow companies to create captive insurance. However, the IRS does take issue with what it calls “abusive” micro-captive insurance, describing it as a “scheme” and placing it on the agency’s list of top tax scams. In these allegedly abusive instances, the IRS argues “promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance.”

The agency disallows any tax benefits it believes stem from micro-captive structures it thinks are abusive.

The settlement offer

The IRS is mailing a settlement offer to about 200 taxpayers currently under audit for what the agency believes are problematic micro-captive insurance schemes. The agency has not closed the door on expanding the program to additional individuals in the future.

The exact offer will be different for each individual, but in general, the IRS says it will require a “substantial concession” of any income tax benefits the person claimed, as well as “appropriate penalties.” However, it will resolve the related audit.

Any eligible individual who is offered the settlement but declines to participate will continue to face the standard audit.

So, if you are offered this settlement, should you take it? That question cannot be answered here. Each situation is unique, and requires an extensive review to determine the best course of action.

Instead, an individual considering this settlement - or any offer from the IRS – should strongly consider consulting with a knowledgeable tax attorney. They can review your case, explore your options and help ensure you only accept terms that are fair.

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