Perspectives on IRS Scrutiny of Captive Insurance Elections

The Internal Revenue Service has made no secret of its increased scrutiny of captive insurance arrangements, particularly those involving the small insurance company election. For taxpayers and their advisors, this has created understandable concern and, in some cases, hesitation about whether captive insurance remains a viable risk management and tax planning tool. Yet heightened scrutiny does not mean prohibition. The Internal Revenue Code continues to recognize captive insurance, Congress has refined it, and courts evaluate it based on well-established insurance principles. The real issue is not whether captives are allowed, but whether a specific taxpayer has a legitimate business need for insurance, has structured the arrangement properly, and has implemented it in a manner consistent with both tax law and insurance fundamentals. Understanding where scrutiny arises, how elections function, and what separates compliant captives from problematic ones is critical for CPAs advising closely held businesses today.