Head’s-Up … A Significant Filing Date for Forms 8886 Is Approaching

 In Will's blog

Almost a decade has passed since IRS activities involving PORCs (that’s Producer-Owned Reinsurance Companies) rose to a level of general awareness of automobile dealers’ CPAs.

It appears the IRS is now in an intensive “information-gathering mode” driven by its suspicion that many auto dealers’ captive insurance arrangements under Sections 953(d) or 831(b) involve abusive tax shelter activities.  It’s suspected to be so bad that “captive insurance” arrangements made it to the IRS’ Dirty Dozen List of Tax Scams for the 2017 filing season.  (See IRS News Release IR-2017-31.)

CPAs for dealerships that have these micro-captive transaction structures should be alert to IRS Notices 2016-66 and 2017-08.

What stands out (where these structures and arrangements are in use) is the necessity that Form 8886 – Reportable Transaction Disclosure Statement requirements must be immediately addressed.  May 1, 2017 is a key filing date we all should be aware of.

We are talking about filings with the IRS OTSA (Office of Tax Shelter Analysis), and possibly – depending on IRS interpretations – with some income tax returns filed for 2016.

Nowadays, the box to check for these arrangements is the Box (e) “Transaction of interest.”  When I last wrote about these in the “Dealer Tax Watch” in Dec. 2003, the box to be checked on Form 8886 would have been for a “Listed Transaction.”

The real problems involve trying to interpret how many people who are involved (or related to others who are involved) need to file Form 8886.  Further complications relate to whether or not information relating to all transactions dating as far back as November 2, 2006 needs to be reported on Form 8886.

Other complications arise depending on whether (1) C Corps or S Corps or other entity arrangements are involved, (2) an intermediary entity is involved between the dealership and the captive, and (3) rules of stock ownership attribution apply under Section 267(b), 267(c) and/or Section 707.  This is heady stuff.

After discussion of interpretations with NADA, the IRS and some of the larger CPA firms whose practices include several hundred captive arrangements, I think it is possible that some general guidance for dealing with these requirements will be made available in the near future by NADA.

However, I will be surprised if the IRS publishes any clarification or guidance before the filing deadline.

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