Commentary: The IRS has microcaptives in its crosshairs

By Jeannette M. Jimenez and Adrian Perry

On July 19, the IRS held a public hearing on the new proposed microcaptive insurance regulations that were published in April. This hearing was a golden opportunity for members of the House Ways and Means Committee to speak out about how small business owners are getting a raw deal from our federal government.

The latest group IRS authorities are targeting is small business owners who use a specific kind of insurance that helped thousands weather the COVID-19 pandemic: microcaptives.

Microcaptive insurance offers risk mitigation for catastrophic events not typically covered by traditional insurance plans. This includes cybersecurity attacks, third-party business interruptions, supply chain disruptions and more.

No one predicted a global pandemic would hit in 2020 – shuttering businesses and sending workers and schoolchildren home on lockdown. For those with foresight, who took the initiative to insure themselves with a microcaptive, business interruptions and financial uncertainty during the pandemic were far easier to withstand.

These are people who did the right thing, setting aside money in advance to safeguard their families’ livelihoods and protect against the unexpected.

In contrast, the IRS has placed microcaptives in its crosshairs. That scrutiny is forcing honest business owners to hire lawyers to defend themselves from tax authorities. In many cases, the agency frequently traps them in legal limbo by placing their business under review while refusing to actually take the case to court. Now, the agency is also considering new regulations that are illogical and appear designed purely to destroy the industry.

It’s not like microcaptives are a new concept. More than 40 years ago, a bipartisan act of Congress established section 831(b) in the tax code, allowing for this form of risk mitigation.

This is deeply concerning to us, as we have personally used a microcaptive and recognize its benefits. Additionally, the industry is growing in our state with Georgia ranked as the 14^th largest captive domicile in the country.

Small businesses have had a lot to worry about during the last three years. Given the existential challenges posed by the COVID-19 pandemic, supply chain disruptions and inflation, coming after small business owners for their insurance plans should be the last thing on the IRS priority list.

Our nation’s leaders and elected officials should be holding up business owners who planned in advance as positive examples of who didn’t rely on government handouts.

Instead, we hear the IRS plans to hire thousands of new agents, some of whom will undoubtedly end up unjustly investigating microcaptive owners.

With the influx of new workers, the IRS should seek out staff who are more interested in following the law than scoring political points. The attacks we are seeing on honest businesspeople by IRS agents who don’t understand insurance or the 831(b) tax code are unconscionable.

Finally, we hope Georgia’s own Congressman Drew Ferguson will consider the safety net microcaptives provide to his constituents and work with the IRS to set reasonable rules and regulations for this important risk mitigation tool.

Dr. Jeannette M. Jimenez, DMD, and Dr. Adrian Perry, DMD, are practicing dentists in the Atlanta area who both use the unique benefits of a microcaptive to protect their small business.