This Insurance Covers You When No One Else Does. The IRS Sees It as a Tax Dodge.

Tax attorney Larry Kemm was quoted in a Barron's article analyzing the IRS' scrutiny of micro-captive insurance. A micro-captive consists of a private insurance entity established to cover a company's specific risks, such as supply chain disruptions; these structures help business owners save money through lower premiums along with tax deductions for the premiums paid to the micro-captive. Typically, organizations use micro-captives in conjunction with standard commercial insurance, which has become particularly important for businesses operating in natural disaster-prone areas where options for traditional insurance are shrinking. However, the IRS has been targeting micro-captives it views as tax dodges, including through new regulations and additions to its watchlist of frequently abused strategies. Mr. Kemm commented that most tax court cases surrounding micro-captives have gone the IRS' way, as the agency is selective about litigation. He also advised that to maintain legitimacy and avoid attention from the federal government, pooled risks must be diversified.

"If you have five people on one square block all issuing against the same risk, is that diversification of risk? It's probably one risk," he explained. "But if you have one person insuring against wildfires in California and another insuring for wildfires in North Carolina, those are different risks and it's hard to argue otherwise."

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