The Internal Revenue Service (IRS) would like us to believe that its enforcement actions targeting captive insurance companies are intended to penalize the industry’s “bad actors.” But…is that really the Service’s objective? Or is it something more sinister?
Over the last many years the IRS used this “bad actor” logic to justify many unseemly things, including seizing the checking accounts of thousands of small businesses across the country who did nothing other than make a series cash deposits into their checking accounts. In these cases, the IRS insisted, without any other evidence, that these cash deposits were evidence of bad actors.
Well, guess what? The Inspector General of the U.S. Treasury has just issued a very damning report finding that more than 90 percent of small businesses who had their checking accounts seized by the IRS HAD DONE NOTHING WRONG. Christopher Ingraham of the Washington Post broke the story on April 5, 2017. According the Ingraham’s article:
The Inspector General took a random sample of 278 IRS forfeiture actions in cases where structuring [a series of cash deposits] was the primary basis for seizure. The report found that in 91 percent of those cases, the individuals and business had obtained their money legally.
“Most people impacted by the program did not appear to be criminal enterprises engaged in other alleged illegal activity,” according to the Inspector General’s news release. “Rather, they were legal businesses such as jewelry stores, restaurant owners, gas station owners, scrap metal dealers and others.”
That’s right, over 9 out of 10 businesses that had their checking accounts seized by the IRS were operating perfectly legally! Without their checking accounts, many of these businesses couldn’t pay their employees, suppliers or creditors. In some cases the reputations and credit of these businesses and their owners were destroyed.
If these unfortunate results were merely incidental to the Service’s legitimate enforcement efforts, it would still be inexcusable. Nine innocents harmed for every bad guy affected is an unacceptable rate of “collateral damage” by any measure. But - and this is the REALLY bad part - these innocent taxpayers were not merely collateral damage. They were, in fact, the actual targets all along!
As the Inspector General said in its press release announcing the report:
“One of the reasons why legal source cases were pursued was that the Department of Justice had encouraged task forces to engage in ‘quick hits,’ where property was more quickly seized and more quickly resolved through negotiation, rather than pursuing cases with other criminal activity (such as drug trafficking and money laundering), which are more time-consuming…”.
“In most cases, the report found, agents followed a protocol of ‘seize first, ask questions later.’ Agents only questioned individuals and business owners after they had already seized their money.”
“In many cases, the property owners provided plausible explanations for their pattern of deposits. But these explanations appeared to have been disregarded or ignored.”
“In most instances, we found no evidence that [agents] attempted to verify the property owners’ explanations…”.
In other words, the IRS knew that these small businesses were easy marks. By engaging in “quick hits” against these perfectly legitimate businesses, the IRS could raise more money for the Treasury more quickly. This is because the cost to these businesses (in legal fees, etc.) of pursuing refunds of their stolen funds in court nearly always exceeded the amount of money in dispute. Thus, by intentionally stealing from legitimate businesses amounts that were less than the taxpayers’ legal fees to resist, the IRS intentionally made it uneconomical for taxpayers to defend themselves. In this manner it executed a near-perfect shakedown of small businesses for years.
CIC Services has long maintained that the Service’s attacks against small captive insurance companies electing 831(b) treatment - like the attacks on the small businesses above - implicate FAR more legitimate businesses than “bad actors,” and are motivated by the same sinister agenda. The IRS spent decades targeting the Fortune 1,000 captives and lost nearly every single court case of consequence over that period of time. In that world, the amount in dispute is large enough that taxpayers will defend themselves and have their rights vindicated by a court.
But this is not so in the small captive space, and the IRS knows this. Consequently, the IRS has focused its attacks in recent years on small captive insurance companies that can’t afford to resist and where things can be “more quickly resolved through negotiation” with the taxpayer rather than litigation (where the taxpayer could have his rights fully vindicated). Such “negotiations” simply involve bargaining (essentially begging) over what percentage of the stolen funds the IRS will agree to return, which is almost always less than 100 percent. With creditors and employees needing to be paid, taxpayers have little “negotiating” leverage.
Not surprisingly, when attacking these small insurance companies, the IRS continues to advance the same pathetic and nonsensical arguments that were long ago discredited by the courts in its attacks upon larger captives.
In short, the Service’s indiscriminate attacks against small captive insurance companies are part of a much larger pattern of racketeering. This pattern is evidenced not just by its attacks upon captives, but also by its attacks upon political opponents and the seizure of thousands of checking accounts of innocent taxpayers. By attacking small captive insurance companies in ways that implicate more legitimate captives than “bad” ones, and then “negotiating” with taxpayers who can’t afford to resist, the IRS is able to successfully extort money time and again from law-abiding taxpayers without ever having its illegal conduct reviewed by a court of law.