On November 9, the U.S. Internal Revenue Service required micro captive insurers to provide more information to determine whether such companies can serve as tax avoidance vehicles. Previously, the IRS had included captive insurers established under the Section 831(b) election of the U.S. tax code on its list of the "Dirty Dozen" tax scams.

        Under the Section 831(b) election of the U.S. tax code, captive insurers pay tax only on investment income; underwriting income is tax-exempt. The annual premium requirement for captives was previously US$1.2 million and was raised to US$2.2 million in 2017. Captives eligible for the 831(b) election are mostly small and medium-sized enterprises that, limited by their scale, cannot establish traditional insurance companies; even some wealthy individuals choose this approach to avoid tax.

        In its latest notice, the IRS stated that 831(b) captives may be used for tax evasion purposes, but also said it currently lacks sufficient information to distinguish tax-avoidance transactions between captives and other third-party related parties. The notice states that the IRS will investigate various transactions of 831(b) captives and require them to submit, by January 30, 2017, explanations of how their various transactions satisfy the rules.

        At present, the IRS still regards 831(b) captives as legitimate entities, and the above notice does not affect captives established for the purpose of underwriting risk; the main purpose of collecting the above information is to prevent abuse of the tax-avoidance provisions.