Source: Caplin & Drysdale, via International Law Office, 25 November 2016
On November 1 2016 the Internal Revenue Service (IRS) issued Notice 2016-66, identifying certain transactions relating to small captive insurers as ‘transactions of interest’.
The new ‘transaction of interest’ designation throws small captive insurer transactions into a tax reporting regime that could potentially lead to significant penalties and IRS income tax and promoter examinations.
Notice 2016-66 states that small captives have the potential for tax avoidance or evasion and identifies certain small captives – and substantially similar transactions – as a transaction of interest, in order to gather more information about why and how small captives are formed and operated.
Taxpayers must report the small captive transaction of interest annually by filing a Form 8886 with their tax returns, beginning with the 2016 tax year.
The notice also requires that transaction participants provide detailed information. This requirement should not be taken lightly, as the IRS can treat an incomplete disclosure as non-disclosure and therefore subject to penalties.