By Amy Lee Rosen

Law360 (April 22, 2020, 6:58 PM EDT) -- Recipients of a soft warning letter from the IRS cautioning against potential adverse consequences of abusive microcaptive insurance arrangements have until June 4 to respond instead of May 4, the agency said Wednesday.

In March the Internal Revenue Service began sending companies Letter 6336 requesting the recipient examine its microcaptive transactions and respond by May 4 with details on the transaction and a signed statement attesting to the truthfulness of the response under penalty of perjury. That deadline has now been postponed by one month, according to an IRS statement. 

"The IRS understands that due to the current conditions, taxpayers may need additional time beyond the stated May 4, 2020, due date to provide their written response," the statement said.

Microcaptive insurance companies pay taxes only on investment income and not on their underwriting income, which is revenue created by premiums on insurance policies minus the cost to settle claims. Under Section 831(b) of the Internal Revenue Code, insurance companies can elect to be taxed only on investment income and not pay income tax on the premiums they receive as long as the premiums are under $2.2 million.

An added benefit of a microcaptive transaction is that the parent is able to deduct the premiums paid as business expenses under Section 162 of the Internal Revenue Code.

However, these transactions have been on the IRS' radar since 2015, when they were first placed upon the "Dirty Dozen" list of potentially abusive tax practices. In 2016, the IRS issued Notice 2016-66 , flagging microcaptives as transactions of interest that required participants to report them on Form 8886 or face penalties.

In September, the IRS began sending settlement letters to as many as 200 companies it believed engaged in abusive microcaptive insurance transactions. In January the IRS said it set up 12 new examination teams that plan to open new audits on microcaptive arrangements in the near future, which may result in "significant civil penalties," the agency said at the time.

Wednesday's statement also encourages recipients of Letter 6336 to consult with an independent adviser on whether they should file amended returns.

In deciding how to respond to the letter, tax practitioners recommended, recipients should understand the history behind microcaptive transactions, assess the facts and circumstances of one's transaction, explore whether the statute of limitations applies to a potential audit and consider filing a qualified amended return. 

The IRS did not respond to additional questions from Law360 on Wednesday.

--Additional reporting by Vidya Kauri, Natalie Olivo, Eli Flesch, Joshua Rosenberg and Dylan Moroses. Editing by Vincent Sherry. 

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