On November 1st of this year, the IRS issued Notice 2016-66 to provide details on reporting requirements for 831(b) captive insurance companies and details how to submit that data and who is required to file.
The IRS has been combating abusive practices of small captive insurance companies for quite some time. Notice 2016-66 will make it easier for the IRS to gain knowledge on what structures are out there and conclude if additional scrutiny is warranted. Much of the information is data that the insurance regulators already receive as part of their initial and ongoing review of captives in their jurisdiction, particularly in domiciles that Oxford operates in. The reporting requirements are also extended to advisors who may be deemed to be material to the transaction.
At a surface level, the Service acknowledges (not surprisingly to those that are active in this space) that 831(b) Captives are “Transactions of Interest” and have the potential for tax avoidance, but also acknowledges that 831(b) Captives can be set up for valid risk management purposes. Recognizing that many 831(b) captives are legitimate, and without sufficient information to determine captive transactions that amount to tax avoidance or evasion, the IRS has designated certain forms of 831(b) captive arrangements to be “Transactions of Interest.”
The “Transaction of Interest” designation requires taxpayers and material advisors involved with captive arrangements that meet criteria in the Notice to file Form 8886 “Reportable Transaction Disclosure Statement” or Form 8918 “Material Advisor Disclosure Statement.” The criteria is so broad that substantially all 831(b) captive insurance arrangements will fall within Form 8886 and Form 8918 reporting requirements.
Captives, insureds and their owners who have participated in 831(b) captive arrangements in any taxable year after November 2, 2006 for which the period of limitations for assessment of tax is open, have until January 30, 2017 to file the required disclosure statements. Taxpayers should contact their tax advisors immediately to determine whether their captive meets the Form 8886 filing criteria.
Advisors involved with any 831(b) captive insurance arrangement should review the material advisor reporting requirements to determine if it applies to them and whether they have disclosure and list maintenance obligations. The filing does not require additional tax, but there are substantial penalties for failing to file the forms. If unsure, they may elect to alternatively make a Protective Filing on or before January 31, 2017.
Industry groups have been concerned with the ability to complete the required filings in the short timeframe provided in Notice 2016-66. On December 29th the IRS issued Notice 2017-08 providing guidance and extending until May 1, 2017, the time for filing participant and material adviser disclosure statements regarding micro-captive deals and substantially similar transactions that were identified in prior guidance as transactions of interest. While this allows industry groups such as Oxford additional time to prepare the required filings, it is nevertheless very important that participants and material advisors provide information to us now, so that we are able to assist them in a timely fashion as originally communicated.
Please bear in mind that Oxford Risk Management Group LLC does not provide tax or legal advice; clients and advisors are encouraged to seek guidance from their tax professional. Oxford is available to assist in the preparation of Forms 8886 and 8918 for our captive clients and advisors. Thank you to the many clients and advisors who have already completed the data gathering process, we appreciate your prompt attention to this important project. If you have not yet engaged Oxford to prepare your forms we strongly suggest that you initiate the data gathering process by clicking on one of the buttons below, which will enable Oxford to compile the information necessary for their completion as quickly and efficiently as possible.
Should you elect to have Oxford assist in the preparation of this form, you may click on the button below to be directed to make a payment by credit card, electronically sign a disclosure statement and complete the intake form.