Captive insurance plans, want to get audited?

When one scheme fails it isn’t long before a resourceful promoter comes up with a different product. Inevitably promoters find some lawyer or accountant to draft a favorable opinion letter and a new industry is born. In a few years, however, the IRS catches up and declares the arrangement to be a listed transaction and abusive tax shelter. As an expert witness I have never lost a case in this field. It is easy to beat the deep pockets of the insurance companies who provide product to these plans. Even though they have business owners sign fraudulent disclaimers saying that the owners will get their own tax advice. These disclaimers are then used when the inevitable happens, the IRS audits and the business owner sues the insurance company.
The latest entries seeking to find a way to make life insurance premiums deductible is a small business captive insurance company or CIC.
How do they work and what will the IRS do? Great questions.
Congress has long given special tax considerations to life insurance. IRC section 101(a) provides that life insurance death benefits can be paid to the beneficiaries’ tax free. The IRS also allows the investment gains of the policy to grow tax free on whole life policies until retirement. If a whole life policy is held until death, the gains are completely tax free.