On January 31, 2020, the IRS issued a news release that warns taxpayers that it has created 12 new examination teams to audit abusive micro-captive insurance transactions.

“Micro-captive” refers to a small insurance company that is controlled by the insured entity, and that meets specific statutory requirements. Legitimate micro-captives that insure commercial risks, charge market-rate premiums and otherwise act as arms’ length insurers enjoy significant income tax benefits. Although the insured entity can deduct premium payments made to the micro-captive as business expenses, micro-captives with no more than $2.3 million in net premium income can elect not to pay income taxes on the premiums received, and are taxed only on their investment income.