Captive Insurance & Captive Insurance Company Services by WMS,LLC  Captive Insurance Management , Captive Insurance Taxation , Captive Insurance Feasibility Studies , Captive Insurance Risk Pools , Captive Reinsurance , Captive Insurance Underwriting , Captive Insurance Accounting , IRS Letter Rulings, Turnkey Captive Insurance Services

Contact Us | Captive Insurance Costs | Captive Insurance Benefits | WMS Captive Insurance Services | Marketing Partners | Risks a Captive can Insure | IRC Section 831(b) Captives | Captive  Tax Benefits | IRS Letter Rulings

Captive Tax Scams

What is Captive Insurance?
Captive Insurance Programs
Captive  Insurance Benefits
Captive Tax Benefits
WMS Captive Services
Captive Feasibility Study
Captive Management
Captive Reinsurance
Captive  Risk Pools
Captive Policies & Limits
Captive Insurance Costs
Estate Planning Benefits
Retirement Benefits
Asset Protection Benefits
Captive  Eligibility
WMS Advantages
Free Consultation
About WMS
Captive  Domiciles
Captive  Taxation
IRS Captive Tax Rulings
IRS Letter Rulings
Captive Tax Scams
Captive Tax Articles
Captive Glossary
IRC Section 831
IRC Section 953(d)
IRC Section 1563
Insurance  News
Legal Disclaimer
Marketing Partners



Captive Insurance Tax Scams

Beware of Bogus Risk Pools

Some captive managers or promoters offer their clients the opportunity to participate in "risk pools" which will allegedly satisfy IRS requirements concerning the amount of third-party or unrelated risks which a Captive must insure in order to be treated as an insurance company for federal tax purposes.

In fact, these risk pools have no real risk, few or no claims, and are marketed to clients that there will be few or no claims and the captive client is assured that more than 80% of the premiums paid into such pools will ultimately be returned to the owner of the captive.   

The IRS is aware of bogus risk pools and has started investigating them. According to industry experts. Bogus risk pools have been identified in St. Lucia, St. Kitts, the British Virgin Islands and elsewhere. Bogus risk pools have also been identified in certain so-called rent-a-captive arrangements aimed at small businesses that cannot afford their own captives.

The IRS will declare that bogus risk pools lacks economic substance and have no real risk shifting or risk distribution. This means that Captives who participate in bogus risk pools will not be treated as insurance companies by the IRS for federal tax purposes. It also means the all the fees a Captive has paid to participate in a bogus risk pool are completely wasted.

In addition, the Captive, its insureds and the Captive's owners would all be immediately liable for substantial back taxes, plus interest and penalties due to the following:

      the premiums paid to the Captive by its insureds by insureds are not deductible,

      the Captive will not qualify for the IRC section 831(b) election to be taxed as a Small Insurance Company,

      if the Captive was formed offshore as a foreign insurance company, it would not be eligible for the IRC section 953(d) election (even if previously granted) which permits a foreign insurance company to be taxed as a domestic US corporation for federal tax purposes.

As the number of participants in a bogus risk pool increases, the chance of the bogus risk pool being identified as such by the IRS also increases.

For all these reasons, bogus risk pools should be avoided. When in doubt, get a second opinion from an independent professional who is not recommended by the promoter. You can also inquire about requesting an IRS Private Letter Ruling which guarantees the tax treatment your Captive will receive from the IRS.  Be suspicious of anyone who tells you that an IRS Letter Ruling is not available, or is useless, or increases your risk of an IRS audit, as all of these are false.