Mandatory Penalty To Non-Complying Shareholders May Be At Issue. Reinsurance Companies Failing To Comply May Be Subject To Thirty Percent Withholding By Direct Writing Company
Shareholders and direct writers of what are commonly known as producer-owned reinsurance companies should be aware of new IRS regulations that require certain shareholders to file an informational form (Form 8938) beginning with their 2012 individual returns. Beginning in 2014, the regulation also makes reinsurance premiums withholdable payments subject 30% withholding if the reinsurance company has not provided certain documentation to the direct writing company.
MarksNelson’s insurance tax practice leader, David Kaseff, an attorney and CPA who specializes in insurance company taxation, has partnered with legal expert Alan Markowitz to notify organizations and shareholders affiliated with producer-owned reinsurance companies of this important regulation and ramifications to both. Kaseff and Markowitz are in the process of assisting such shareholders and direct writers analyze their current status to determine next steps. However, Kaseff and Markowitz endeavor to make it perfectly clear to both shareholders of producer-owned reinsurance companies and the relevant personnel at the direct writing companies that the forms required by the IRS pursuant to the new regulation are for informational purposes only and result in no additional tax.
At issue is the Foreign Account Tax Compliance Act, or FATCA. FATCA was enacted in 2010 to prevent and detect offshore tax evasion and improve taxpayer compliance by requiring documentation, withholding and reporting requirements on payments to Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs).
“This new regulation will affect a good number of automobile dealers who own offshore domiciled producer-owned reinsurance companies, as well as their shareholders, third-party administrators (TPAs), and direct writing companies,” said Kaseff. “Our clients are extremely grateful for the early notifications we’ve given them and expert advice to save them from some pretty major headaches next year.”
Both the shareholders and the direct writing companies with which their reinsurance companies do business should understand that the new regulation is not necessarily directed toward the typical dealer owned reinsurance company. From all appearances, the new regulation is directed toward companies making the 953(d) election that actually have offshore accounts, such as bank accounts, investment accounts or any other type of financial account, which is usually not the case with the typical dealer owned company. The type of 953(d) company that the IRS appears to have its attention concentrated toward are those that have foreign owners and may have the ability to “convert” the company to a foreign company, in which case the IRS would forever lose track of the company’s assets.
Kaseff and Markowitz are comfortable in saying to the shareholders of the producer-owned companies that Form 8938 requests no information additional to that which is contained in a reinsurance company’s annual Form 1120 PC. Therefore, any information requested by the Form 8938 is already known to the IRS.
The final FATCA regulations provide a specific definition for the term “U.S. person.” The definition specifically excludes a company that makes a Section 953(d) election unless the company is licensed to conduct business in a particular state.
“The current definition does not leave much to the imagination,” Kaseff said. “We encourage shareholders of producer-owned reinsurance companies to consult with their personal tax advisors and make an informed decision before making a determination regarding the necessity to file Form 8938.”
Form 8938 is currently available, and if applicable, should be filed with shareholder’s 2012 tax return. The IRS will make the relevant form to be provided to the direct writing company available in the next few months.
David Kaseff is the insurance tax leader at MarksNelson, the largest locally-owned accounting and consulting firm in Kansas City, and specializes in the taxation of insurance companies, captives, and producer-owned reinsurance companies. He was formerly with PriceWaterhouse Coopers on the national captive team and has been the recipient of the Bingham Sommers Award for Overall Excellence in Taxation. He is past Chair of the Heart of America Tax Institute.
Alan Markowitz is an attorney in Kansas City, Missouri who has been representing producer-owned reinsurance companies since 1977, and whose practice is devoted exclusively to the structuring, formation, administration, compliance and tax issues relating to such companies.