Captive Insurance and the 5th Amendment

Click here to link to an IRS summons enforcement recommendation issued by a federal magistrate judge in Massachusetts on April 19^th, where the summonsed witness appeared as required, but asserted his 5^th Amendment privilege against self-incrimination in response to questions by the IRS. The case has a couple of interesting  issues.  First, in upholding the 5^th Amendment claim, there is a very good discussion of how and why the 5^th Amendment can be raised in an IRS civil tax examination.  There are very few reported cases where a taxpayer asserts a 5^th amendment privilege and the IRS moves to enforce the summons.  Most tax professionals do everything they can to keep their clients from being summonsed and claiming the 5^th Amendment. Even if the taxpayer is summonsed and claims the 5^th amendment, the examiner typically does not ask for enforcement of the summons, but instead either proposes a 75% civil fraud penalty under IRC Section 6663 or refers the case to the IRS Criminal Investigation Division.  However, in many situations, the last link in the chain for the IRS examiner to propose a 75% civil fraud penalty or make a referral to CID is the taxpayer’s testimony.  If the taxpayer claims his 5^th amendment rights, that last link is not completed.

The second matter of interest is the continuing efforts by the IRS to examine captive insurance arrangements and promoters.  While captive insurance is a legitimate insurance and tax planning tool, it is one of the transactions the IRS contends is subject to abuse.  The court’s recommendation discusses the IRS investigation of taxpayers and promoters and the IRS including captive insurance on its annual list of tax scams known as the “Dirty Dozen”.