The IRS is providing welcome relief for compliance measures associated with its new micro-captive insurance company reporting and disclosure rules. Although the scope and substance of required filings by participants and their material advisors has not changed, the IRS announced on Dec. 29, 2016 through Notice 2017-08 that the due date for such filings has been extended to May 1, 2017. Parties participating in these transactions formerly had until Jan. 30, 2017 to gather a robust volume of information associated with (potentially) many years of transactions, while simultaneously compiling this information into the required IRS filing. Material advisors were required to file by Jan. 31, 2017. Now both groups are timely if the required forms are filed by May 1, 2017.
As background, the IRS unveiled on Nov. 1, 2016 to disclose information pertaining to certain transactions made by captive insurance companies that have made the election under Code Section 831(b) to exempt premiums earned from income (micro-captives). Our previous article analyzes this new requirement under Notice 2016-66 in detail. The disclosure requirement applies to all parties that have “participated” in these transactions, as well as material advisors. In most cases, reporting is required if a participant entered into a transaction after Nov. 2, 2006, but as of Nov. 1, 2016, reporting is limited to years for which the statute of limitation for assessment remains open.
Disclosure is completed on Form 8886, Reportable Transaction Disclosure Statement, to the IRS Office of Tax Shelter Analysis (OTSA). For transactions involving prior years that are within the scope of reporting, Form 8886 must be filed on or before May 1, 2017. For current year and prospective participation, a properly completed Form 8886 must be attached to the tax return, and a duplicate copy must be sent to OTSA if the transaction is being disclosed for the first time. If a first time participant files its income tax return prior to May 1, 2017, however, the due date for filing the Form 8886 is still extended to May 1, 2017. If the taxpayer extends the filing and the extended due date is after May 1, 2017, the disclosure should be attached to the return with the copy sent to OTSA.
A taxpayer that does not comply with the disclosure rules is subject to a penalty equal to 75 percent of the tax benefits obtained from reporting the transaction on the taxpayer’s return (capped at $50,000 for entities and $10,000 for individuals), where the minimum penalty is $10,000 for entities and $5,000 for individuals. Parties participating in these micro-captive transactions must develop an immediate strategy to comply with the May 1, 2017 reporting deadline. Contact your CBIZ MHM tax professional to make sure that you are in compliance with these new reporting requirements.
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