GAO Study Finds IRS Audit and Investigations of Micro-Captive Insurance Deficient

Recently, the US Government Accountability Office (GAO) issued a report on how the IRS could improve its review of offshore insurance audits and investigations.¹The GAO issued the report at the request of Senator Grassley as a member of the Judiciary Committee. Specifically, the GAO was asked to review what guidance IRS provides about complying with laws related to offshore insurance accounts and how IRS conducts enforcement on offshore insurance-related non-compliance. The GAO’s report assesses the extent to which IRS:

• Reviews its guidance on offshore insurance to ensure that the guidance has its intended effect;
• Aligns oversight of its audit activities on taxpayers who may be abusing micro-captive insurance tax shelters with its audit policies and guidance; and
• Reviews its investigation activities on promoters who market abusive micro-captive insurance tax shelters.

The GAO reviewed IRS procedures on issuing guidance and on reviews of promoter investigations, reviewed files on audits related to micro-captive insurance tax schemes, interviewed IRS officials, and compared IRS procedures with IRS policies and selected federal standards for internal control.

According to the GAO report, SB/SE has opportunities to better target micro-captive audits with managerial reviews, while LB&I could benefit from formally documenting managerial reviews of audits and using such documentation to resolve detected deficiencies. Additionally, IRS has opportunities to better leverage its quality review program concerning audits of micro-captive insurance tax arrangements by more precisely targeting micro-captive insurance.

The GAO also found that similar opportunities exist for investigations concerning promoters of micro-captive insurance tax schemes. As with audits, IRS has opportunities to more rigorously target micro-captive promoter investigations for formal managerial and quality review, begin to track and document managerial and quality reviews with data, and establish metrics that would help the IRS better determine how well it conducts investigations of promoters. By taking actions to ensure the quality of audits and promoter investigations, the IRS would be more confident that its audits and promoter investigations were being conducted properly and using its resources effectively.

The GAO made the following recommendations:

1. The Commissioner should have SB/SE provide more specific guidance on when SB/SE should use various managerial review tools and the frequency with which such reviews should be conducted on high-priority matters such as those surrounding micro-captive insurance arrangements.
2. The Commissioner should have LB&I adopt formal managerial reviews of its audits and establish methods and procedures for recording and analyzing managerial review data that allow it to isolate high-priority cases, including micro-captive insurance audits, and use the data to assess the quality of its audits.
3. The Commissioner should have SB/SE and LB&I subject a sample of their micro-captive insurance audits to a formal quality review process. Based on the findings of this review, SB/SE and LB&I should take corrective action to remedy any deficiencies.
4. The Commissioner should have SB/SE design and implement an identification and tracking method in EQRS to allow agency officials to readily identify and compare managerial reviews of micro-captive promoter investigations, both to other micro-captive promoter investigations, and promoter investigations generally, and use the data to assess the quality of its promoter investigations.
5. The Commissioner should have LB&I adopt formal managerial reviews of micro-captive insurance promoter investigations, establish a reliable way to store and track managerial review data of promoter investigations that allows it to isolate high priority cases, issue guidance on how often and by what method such investigations should be subjected to managerial review, and use the data to assess the quality of its promoter investigations.
6. The Commissioner should have SB/SE develop a method to assess the quality of promoter investigations and apply this method to micro-captive promoter investigations. Based on these reviews, SB/SE should take corrective action to remedy any deficiencies uncovered in its analysis.
7. The Commissioner should have LB&I establish and implement metrics on promoter investigation quality and subject a set of micro-captive promoter penalty investigations to formal quality review procedures to establish a baseline measure of micro-captive promoter investigation quality. Based on these reviews, LB&I should take corrective action to remedy any deficiencies uncovered in its analysis.

In response, the IRS expressly disagreed with the recommendations, stating that its current oversight practice and procedures are sufficient to ensure that micro-captive audits are conducted accurately and citing resource constraints. However, GAO maintains that the IRS’s procedures should be improved and can be done so with minimal use of resources.

Endnotes

¹ See GAO.gov/products/gao22-104180