|Lance Wallach: For Expertise You Won't Find Anywhere Else
|Should you consider a captive?
Captives are also subject to audit. Many former sellers of 419 412i and other abusive tax shelters are now selling captives as a way to sell
life insurance. The IRS is looking at that structure and at them. We are starting to get phone calls about captive audits.
Our former IRS manager or our tax lawyer CPA represents our clients’ interests during tax audits to ensure they pay only their fair share of
taxes. Our Audit Representation provides a comprehensive range of services, including:
- Audit coordination
- Audit review and opportunity assessment
- Audit sampling analysis and evaluation
- Controversies and appeals
- Responses for information and document requests
- Risk assessments
- Tax audit representation
- Tax compliance and reporting evaluation
- Taxability determinations
- Voluntary disclosure and registration
|What taxes should a captive be
|How do you get to be lucky enough to be chosen for |
|Types of Audits|
|Which tax returns can they audit?|
|The audit process|
|Best practices to avoid negative outcomes|
Books our Legal & Tax Audit Experts
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|Captive Screening Services:
The decision to form a captive is complicated. More importantly, it's possible that through no fault of your own you don't know what
questions to ask. If you need a trusted adviser to help you sort through all the other captive providers out there to make sure your captive
is formed properly, we can help. Given our industry and legal experience, we know what questions to ask captive providers to make sure
they have the capabilities you need. We will help to make sure the fit between your business and the captive provider is as seamless as
When we perform this service, we do not compete for the captive business.
Our tax lawyer CPAs, and former IRS agents will help you consider this area which is looked at by the IRS.
Captive Insurance Companies are often overlooked
as a strategic initiative by finance and tax
professionals, as the benefits are not easily
understood or explained. With the proper guidance,
the economic advantages of a Captive program
- Improved cash flow
- Reduced insurance costs
- Tax savings
- Insurance coverage flexibility
- Buyer Beware
- IRS does look at captives
- Consider filing under IRS 6707a to avoid
potential IRS fines.
Captives now number over 10,000. Many of these captives are located in Bermuda, Bahamas, British Virgin Islands, Cayman Islands,
Guernsey, and the Netherlands Antilles. Several billion dollars in premiums flowed through Bermuda based companies last year alone. Of
the U.S. Fortune 500 companies, over half have captives.
What is a Captive Insurance Company?
A captive insurance company is a company whose charter permits it to offer insurance to its parent or sister subsidiaries in return for
premiums. Usually, this company is located offshore for tax reasons.
Why Start One?
In almost every case, captives are started because of a general dissatisfaction with existing insurance coverage or costs. The advantages
are in these areas: Insurance, Commercial, Financial, and Tax.
Insurance A captive can provide insurance for risks which may not be normally insurable. For example, there is limited insurance available
in the areas of strikes, product recall, patent suits, etc. Loss experience is based on the company's experience rather than being averaged
with others that have less stringent controls and are therefore more prone to claims. Reduction of insurance costs is available as there is no
sales force, claims administration group or other overhead to pay for. Insurance company direct costs can run up to 50% compared to
around 5% for captives. Insurance income is earned on premiums because ceding commissions from reinsurance companies, inure to the
captive rather than to an outside insurance company.
Commercial The prime advantage is the ability to earn interest on capital and reserves, thus turning a cost centre into a profit centre. The
development of insurance to enhance product acceptability via insurance at the “prenatal” development stage is a good example of this.
The ability to be more flexible in the settlement of claims is possible; i.e., perhaps a company would wish to make a commercial judgment
on a claim where an advisor or wholesaler might be held to be either more or less liable, as the case may be under ordinary insurance
proceedings. The ability to benefit from situations where evidence of insurance is more acceptable than a company guarantee or promise
to pay; i.e., sick leave insurance for employees where a union wants a policy of state benefits.
Financial Captives provide the opportunity for converting specific reserves to insurance costs at the parent level thus converting posttax
reserves to pretax expenses. Examples of this could be for building reserves for potential product liability or a subsidiary’s potential debt,
or for providing guarantees, etc. The ability to lower costs derived from the realistic evaluation of exposure vis-à-vis existing premium/risk
expenses is available. The ability to transfer normally nonconvertible funds for exchange control purposes to a subsidiary as a genuine risk
financing measure is generally available. The improvement of cash flow is available using a Captive as in the case of claims where the
Captive has use of funds until the claim is settled. In the case of reinsurance, premiums are paid quarterly in arrears instead of yearly in
advance as for normal insurance. Premium expense is generally deductible at the parent level, but income earned on investment at the
captive level is not taxable. Special rules apply for U.S. and Canadian companies. The lack of regulation of investments at the Captive level
mean funds could, with prudence, be used to finance the needs of sister companies.
Tax Premiums paid to a captive are generally deductible at the parent level (U.S. and Canadian companies require special planning, but
remember the tax advantages are merely a bonus to the whole Captive idea). Capital, reserves, and premiums are not taxed in most
offshore locations. The success of a Captive relies on good management not good luck. Top management must understand the long-term
commitment to captive insurance. Bad risk assessment or a series of unlucky occurrences can cost a Captive dearly in the early years.
Annual premium costs alone are not a sufficient criteria for establishing a Captive. Most importantly, a company needs a good spread of
risks and a low maximum loss potential.
Banking Advantages Captive reserves may be invested in the money markets. Loans may be made to provide funding capital for the
Captive. Loans can be made to provide premiums which have to be paid in advance. Loans for claims payments may be made where
assets are temporarily not available in the Captive or the Captive is involved in legal action. New banking relationships are available with
the Captive and new business can be obtained. Access to reinsurance companies as possible clients may become possible and added
service may be offered to existing clients. Possible foreign exchange dealings are feasible; e.g., premiums, claims, or reinsurance.
Security custodianship of investment is available.
In our opinion if your captive in domiciled in the U.S. you may have less IRS exposure. Our team of ex IRS agents, tax lawyer CPAs and
other experts can discuss this important issue with you.
|Captive Insurance -Do You Need Offshore Protection??
|Eliminate All Tax Risk with a Private Letter Ruling from the IRS. We will act on your behalf to request a Private Letter Ruling from the IRS
which states that your Captive will receive favorable IRS tax treatment on its most critical tax aspects. In the publication of Rev. Proc.
2002-75 the IRS established that it will provide guidance through the issuance of Private Ruling Letters on captives relating to:
i. Whether there is requisite risk shifting and risk distribution necessary to constitute insurance for purposes of determining the deductibility
of premiums as ordinary and necessary business expenses: and
income tax purposes.
- Rising health insurance premiums
- A bad experience with an insurance company
- The inability to write your own insurance contract(s)
- An unwanted escalation in property and casualty insurance rates
- The inability to find insurance, or the inability to find appropriately priced insurance
- The need to broaden your overall insurance coverage.
- The desire to obtain the tax savings associated with a captive program
And while you've probably heard about "captive insurance," it's likely that you want to learn more about the exact benefits of a captive and,
most importantly, how they relate to YOUR individual situation. But, because this is a new concept, it's difficult to know where to even
To help you figure out if a captive insurance program is right for your business give us a call. The IRS looks at many captive arrangements. If
you use the captive for estate planing or to deduct life insurance you will have an IRS problem.
Programs to Achieve
|We can help your business set up its own captive insurance company to insure or reinsure the risks that a company assumes while doing business.
We will review existing risks and analyze non-traditional risks that a company may be exposed to and not even be aware exist. Captives have been
used for over forty years, and historically they were used by larger companies. However, they have increasingly become an invaluable tool for the
successful small to mid market. As the cost for insuring risks has increased, many business owners have found a way to more efficiently manage their
risk by forming their own captive insurance company to provide for protection against loss. In doing so, the business owner can take advantage of
substantial federal and state income tax savings and utilize those savings to fund other business opportunities.
Captive insurance is insurance or reinsurance provided by a company that is formed primarily to cover the assets and risks of its parent company or
companies. Captive insurance is essentially an "in-house" insurance company with a limited purpose and is not available to the general public. It is an
alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves
financially while having more control over how they are insured. There are many advantages to a company when establishing a captive insurance
Lance Wallach is not part of CJA. Lance Wallach has been asked to help in lawsuits against CJA for their 419 plans. Lance Wallach has been asked
to help by people in the 419 plan when they get audited by the IRS.
|Captive Insurance Companies and
Risk Retention Groups
Managed properly, a captive insurance
company can be an effective way of
financing the cost of risk. And a key
member of a successful captive
management team is the actuary. The
actuary can help the management
team answer the many questions faced
by a captive such as:
- Are the premiums adequate?
- How are the premiums allocated?
- Is there sufficient capital?
- Is the reserve adequate?
- What is the appropriate retention?
- What insurance coverage is to be
- Is reinsurance to be purchased?
- What is the appropriate investment
- What are appropriate financial
- How is the health of reinsurers or
- What are the ratings from the rating
- What are the data capture needs?
- Are you compliant with regulatory
- How is the transfer of risk being