Commissioner Long – congratulations on your confirmation. As someone who spent years in Congress fighting for common-sense government, you now have the chance to bring that same mindset to one of the most distrusted agencies in the federal government.
There is certainly no shortage of taxpayer concerns in need of your attention, but I believe one issue in particular demands immediate action: the IRS’s past treatment of 831(b) micro-captive insurance companies.
The Service’s final rule on micro-captives, issued right as President Biden left office in January of this year, risks designating a majority of 831(b) arrangements as either transactions of interest or listed transactions. As you know, these designations impose a serious regulatory burden on small businesses and make it much more difficult to focus on their main priority – serving their clients’ and customers’ pressing business needs.
The regulations disregard the clear congressional intent that introduced Section 831(b) into the Tax Code under President Reagan, and was later reaffirmed and strengthened under the PATH Act. It is clear now, as it has been over the past forty years, that providing alternative risk management tools for small and mid-sized businesses is vital to the health of our economy. The Service’s stance is clear based on the issued regulations: there is a presumption of guilt if a business utilizes a micro-captive. Based on the number of businesses that currently have a micro-captive insurance company under IRS review (over 1,100 now) that the Service is not looking for solutions, but rather penalizing hard-working business owners who followed the law but now face hefty regulatory compliance costs and legal uncertainty.
Unfortunately, this is just the latest in a long pattern of behavior from the Service. Over the past decade, the IRS has consistently relied on aggressive enforcement tactics and failed to work in good faith with business owners. These are often family-owned businesses, agricultural operations, and main street employers who formed micro-captive insurance companies for the same reasons any individual or company does: to manage risk and protect their livelihood.
I believe you have an opportunity to change the current antagonistic climate. You can demonstrate that the IRS doesn’t have to operate like a hammer constantly in search of a nail, but rather, like a thoughtful regulator in search of solutions that work for all interested parties.
I encourage you to make this issue a top priority in the early days of your term as commissioner.
A great first step would be to simply pause enforcement of the final rule. That will offer the Service time to engage with the industry in good faith, as well as affected small businesses, and hear their stories about the harm this rule will do and has done. I believe that holding a transparent and honest discussion in this manner is possible. Doing so will open the door to a fair, common-sense set of regulations that are workable and acceptable to both the Service and the captive insurance industry.
Concerned professionals understand there have been abuses (as evidenced in some of the egregious cases where the IRS won in court). We recognize the need for a more structured approach. However, the current regulations punish businesses instead of protecting them, which is the opposite of what Congress intended when it created this section of the tax code. Our plea is for your help in formulating a set of standards that clearly distinguish legitimate captives from abusive ones.
Small business owners are looking for leadership and good faith partnership. They are hoping you will be the commissioner who delivers it.
President of SRA 831(b) Admin. He has over a decade of experience in the micro-captive insurance industry, having been with SRA since its inception. He also works to educate the business community about the benefits of captive insurance and advocates for the federal government to provide clarity to business owners.
