IRS Notice 2016-66: 831(b) captives must report to help IRS combat abuses

The IRS has issued long-anticipated notice, in the form of Notice 2016-66, of its intent to combat real and perceived abuses of small captive insurance companies that have made the 831(b) election. 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 stopped short of designating all 831(b) captive arrangements as a “Listed Transactions,” but 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.” Certain of the criteria (including those for non-mutual captives that have incurred insured losses and claims administration expenses of less than 70% of earned premiums over a five-year period) are so broad that most 831(b) captive insurance arrangements will fall within these Form 8886 and Form 8918 reporting requirements.

Persons who have participated in such 831(b) captive arrangements (particularly captives, insureds, and owners of passthrough insureds), 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 May 1, 2017 (updated December 29, 2016 – see Notice 2017-08) to file the required disclosure statements.

Taxpayers involved in an 831(b) captive insurance arrangement should contact an experienced captive insurance tax advisor immediately to determine whether their captive meets the Form 8886 filing criteria.

Advisors involved in an 831(b) captive insurance arrangement should review the material advisor reporting requirements to determine whether they have disclosure and list maintenance obligations under IRC §§ 6111 and 6112.

(Update April 21, 2017: On March 27, 2017, two captive insurance managers, CIC Services, LLC and Ryan, LLC filed motions in the U.S. District Court for the Eastern District of Tennessee to prevent the IRS from enforcing the IRS’s reporting requirements under Notice 2016-66.  On April 21, 2017, the court denied the managers’ motions. So, the due date for Forms 8886 and Forms 8918 related to the 831(b) Micro-Captive Transaction of Interest is still May 1, 2017.)

To discuss your situation, contact Chris Riser at 706-552-4800.