In the past, individuals who participated in micro-insurance transactions were likely audited by the IRS. The tax agency has listed the scheme as one of its “Dirty Dozen” tax scams, and it has been talking about the practice for many years now. It says that there are about 500 cases involving micro-insurance transactions currently being contested in court. However, the IRS has never lost such a challenge from taxpayers in Georgia or anywhere else.

Recently, the IRS mailed settlement offers to more than 200 taxpayers. Those who accept the offer must show that they have given back the benefit derived from claiming these transactions on a tax return. Depending on the circumstances of the case, they must also be willing to pay financial penalties. While micro-captive insurance providers have drawn the ire of the IRS, captive insurance companies have been seen as legitimate business entities since 2002.

Smaller property or casualty insurance providers may choose to be taxed on their net investment income instead of their premium income. However, individuals who refuse a settlement offer related to their participation in micro-captive schemes could lose captive insurance deductions as well. Those who do not receive a letter from the IRS are not eligible for a settlement and will likely continue to go through the audit process.

Taxpayers who are being audited or have taken a dispute with the IRS to court may want to hire an attorney to help with their cases. Doing so may make it easier to obtain a favorable outcome in a shorter period of time. An attorney is able to review the case in an objective and dispassionate manner. Doing so may make it easier to come to a resolution based on the strength of the facts in a given matter.