In some fraudulent schemes, a firm pays a mini-captive for “insurance,” while the captive secretly remits most of the money back to the parent owners, typically by placing it in an offshore account. The bogus mini-captive, in other words, simply serves as a front for funneling funds to offshore accounts while allowing the U.S. firm to claim a phony tax deduction for premiums paid along the way.
In some versions of this scam, control of the funds is actually relinquished to another owner (typically an offshore entity) for a period of time with the agreement that it will later be returned – perhaps in five years. These often turn out to be true scams: In several documented cases, the offshore entity (or its promoter) has absconded with the clients’ funds and, when threatened with legal action, has threatened to expose the clients to the IRS as tax evaders.
There are two lessons to be learned for any potential mini-captive owner: First, do not be tempted by any type of mini-captive program that is either manifestly illegal or that mysteriously promises significantly greater benefits than a legitimate mini-captive could deliver. Whether resulting from IRS scrutiny or predatory deception, significant risks and penalties are likely to occur.
As an expert witness Lance Wallach has never lost a case. Hopefully you will not need him.