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Rachel Partain Comments on Microcaptive Exam in Tax Notes

April 23, 2020, Tax Notes

The IRS has provided taxpayers more time to notify the agency that they have ceased involvement in microcaptive transactions, but examinations could follow amid the coronavirus pandemic for taxpayers continuing to reap the benefits.

. . .

Given the IRS’s announcement earlier this year, “the next step after the responses are submitted and processed should be a new round of IRS examinations,” Rachel L. Partain of Caplin & Drysdale told Tax Notes.

“Taxpayers who filed 2016 returns on extension in October 2017, particularly taxpayers who ceased participating in that year, may consider whether to amend the 2016 return or whether the IRS can open new exams before October 2020,” Partain said.

. . .

Partain suggested that taxpayers responding to Letter 6336 consider “whether to provide a response under penalties of perjury, especially as there are ambiguities in the statement requested by the IRS.”

For example, the IRS requests information concerning “when the taxpayer 'ceased participating' in the captive arrangement without defining what that phrase means,” Partain said.

“In the reportable transaction context, participating is a term of art that means report tax benefits,” which the IRS asks separately when it requests the last tax year in which the taxpayer claimed deductions or other benefits for microcaptive insurance premiums, Partain said.

The letter suggests that taxpayers file qualified amended returns “to eliminate prior insurance expense deductions,” Partain said. “Presumably, taxpayers that take this approach will eliminate the deduction in full whereas taxpayers under exam were offered a 10 percent allowance in the settlement resolution.”

For the full article, please visit Tax Notes’ website (subscription required).

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