Incentives for Tax Abuse by Micro-Captive Insurance Companies

Abstract

Micro-captives operating under Section 831(b) of the Internal Revenue Code, were originally designed to provide small and mid-sized businesses with an effective means of self-insurance while offering certain tax advantages. However, these entities have increasingly been exploited for tax avoidance rather than legitimate risk management. In response, the IRS has classified certain micro-captive transactions as abusive tax shelters, leading to heightened regulatory scrutiny and legal action. This thesis examines how micro-captive insurance companies have deviated from their intended function and how management has leveraged tax benefits in ways that undermine regulatory intent. Specifically, the research will explore the mechanics of captive insurance, the structures that enable tax avoidance, and the enforcement measures taken by the IRS and other regulatory bodies. The study will also incorporate insights from industry professionals to provide a balanced perspective on the issue.