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WASHINGTON — For the third consecutive year, the IRS places abusive micro-captive insurance tax shelters on its list of "Dirty Dozen" tax scams. The list, compiled annually, describes a variety of common scams that taxpayers may encounter. Many of these schemes peak during filing season as people prepare their returns or hire others to help them.

"Taxpayers should avoid unscrupulous promoters who encourage the use of phony tax shelters designed to avoid paying what is owed," said IRS Commissioner John Koskinen. "These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place."

The IRS continues to address those using abusive shelters through audits, litigation, published guidance and legislation.

Tax law generally allows businesses to create "captive" insurance companies to protect against certain risks. Traditional captive insurance typically allows a taxpayer to reduce insurance costs. The insured business claims deductions for premiums paid for insurance policies. Those amounts are paid, either as insurance premiums or reinsurance premiums, to a "captive" insurance company owned by the insured or parties related to the insured.

Under section 831(b) of the tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income, so that the captive pays tax only on its investment income.

In abusive "micro-captive" structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance. For example, coverages may insure implausible risks, fail to match genuine business needs or duplicate the taxpayer's commercial coverages. Premium amounts may be unsupported by underwriting or actuarial analysis, may be geared to a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage.

Policies may contain vague, ambiguous or deceptive terms and otherwise fail to meet industry or regulatory standards. Claims administration processes may be insufficient or altogether absent. Insureds may fail to file claims that are seemingly covered by the captive insurance.

Captives may invest in illiquid or speculative assets or loan or otherwise transfer capital to or for the benefit of the insured, the captive's owners or other related persons or entities. Captives may also be formed to advance inter-generational wealth transfer objectives and avoid estate and gift taxes. Promoters, reinsurers and captive insurance managers may share common ownership interests that result in conflicts of interest.

In Notice 2016-66 (Nov. 1, 2016), the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as "Transactions of Interest." The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006, and created disclosure and list maintenance obligations for material advisors.

Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective Jan. 1, 2017, established diversification and reporting requirements for new and existing captives.

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Upcoming Tax Dates

April 10 — Employees who work for tips
If you received $20 or more in tips during March, report them to your employer. You can use Form 4070.

April 15 — Individuals *2017 Filing Deadline: 04-17, 2018*
File a 2017 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic 6 month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. For more information, see Form 4868. Then, file Form 1040, 1040A, or 1040EZ by 10-15.

April 15 — Corporations *2017 Filing Deadline: 04-17, 2018*
File a 2017 calendar year income tax return (Form 1120) and pay any tax due. Details

April 15 — Individuals
If you are not paying your 2018 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2018 estimated tax. Use Form 1040ES.

April 15 — Household Employers
If you paid cash wages of $2,000 or more in 2017 to a household employee, you must file Schedule H Details

April 15 — Corporations
Deposit the first installment of estimated income tax for 2017 Details

April 15 — Social security, Medicare, and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in March.

April 15 — Household employers
If you paid cash wages of $$2,000 or more in 2017 to a household employee, you must file Schedule H (Form 1040). If you are required to file a federal income tax return (Form 1040), file Schedule H (Form 1040) with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H (Form 1040) if you paid total cash wages of $1,000 or more in any calendar quarter of 2016 or 2017 to household employees. Also, report any income tax you withheld for your household employees.

April 30 — Social security, Medicare, and withheld income tax
File Form 941 for the first quarter of 2018. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter timely, properly, and in full, you have until 05-10 to file the return.

April 30 — Federal unemployment tax.
Deposit the tax owed through 03-if more than $500.

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