Material advisors and certain participants in reportable micro-captive transactions will not face penalties for failing to file disclosure statements originally due at the end of April if such statements are filed within a three-month grace period, the IRS announced. (Notice 2025-24)
Background.
Final regs (TD 10029) issued January 14 under Code Sec. 6011 identify transactions that are the same as, or substantially similar to, listed micro-captive transactions reportable to the IRS. Generally, listed transactions and substantially similar transactions are those the IRS has determined to be a known method of tax avoidance or abusing the Tax Code.
Micro-captive listed transactions involve an insured entity that owns at least 20% of a captive insurance company’s voting power or value. The entity deducts insurance “premiums” to avoid income taxation under Code Sec. 831(b). The IRS first flagged the practice in Notice 2016-66, naming the transactions as those of interest for compliance enforcement purposes.
The 2016 notice explained that in these transactions, “a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as an insurance company.”
January’s final regs identify other micro-captive transactions of interest that must also be reported to the IRS and the Office of Tax Shelter Analysis (OSTA) through disclosure statements. These are micro-captive transactions in which the captive has less than a 65% loss ratio calculated during an applicable period.
Code Sec. 6707(a) imposes penalties on material advisors and certain transaction participants for untimely disclosures. Monday’s notice explained that disclosure statements “must be attached to the taxpayer’s tax return for each taxable year for which a taxpayer participates in a reportable transaction,” including amended returns.
Deadlines and penalty relief.
Material advisors who made a tax statement on or after January 14, 2019, must file disclosure statements by April 30, 2025.
However, the IRS acknowledged that there are concerns among stakeholders “regarding the ability of micro-captive reportable transaction participants to timely comply with their initial filing obligations with respect to” micro-captive listed transactions and transactions of interest as defined in the final regs.
The limited relief waives Section 6707(a) penalties if the required disclosures are made by July 31, 2025, in accordance with the instructions of Form 8886, Reportable Transaction Disclosure Statement, or Form 8918, Material Advisor Disclosure Statement.
Penalty relief does not apply “for participants required to file a copy of their disclosure statements with OTSA at the same time the participant first files a disclosure statement by attaching it to the participant’s tax return,” the IRS said.
Those outside the scope of the relief seeking more time should file for an extension to submit their tax return, the notice recommended.
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