Abusive Micro-Captive Insurance: An IRS Whistleblower Guide
A micro-captive insurance company is company where it's owners are taxed on investment income only. This makes it open for abuse by client advisors and those looking to avoid paying taxes. Learn about more about this type of scheme, the IRS whistleblower program, and award eligibility in this FAQ.
Updated
May 14, 2025
A micro-captive insurance company is taxed under IRC § 831 and its owners elect to be taxed on investment income only. It allows insurance companies to receive up to $1.2 million per year from premiums paid with an effective federal tax rate of zero (0%) percent.
As you can imagine, those looking to avoid paying taxes have rushed to take advantage of this loophole. Wealth and financial planners persuade owners micro-captive insurance companies to participate in the scheme or to create their own.
However, these companies clearly lack any substantial characteristics of real insurance and are structured with the intent of tax exploitation. This puts them under greater scrutiny by the IRS, who urge those participating in such arrangements to exit promptly.
Identifying Abusive Micro-Captive Arrangements
Abusive micro-captive insurance arrangements almost always contain farfetched risks. They also fall short of providing coverage to any legitimate business need. The premiums paid on these arrangements are irrational compared to genuine arrangements, which is a sign of being “abusive.”
Rewards for Reporting Abusive Micro-Cap Insurance
Abusive micro-captive insurance arrangements almost always contain farfetched risks. They also fall short of providing coverage to any legitimate business need. The premiums paid on these arrangements are irrational compared to genuine arrangements, which is a sign of being “abusive.”
The eligibility requirements for receiving a reward include:
- The amounts involved must be over $2 million, which can be calculated over the span of several tax years; for individuals, their income must exceed $200,000.
- The information submitted must be original, credible, and timely, and it must be independently verified.
- Must be willing to work in a confidential manner with the IRS during an investigation without any specific provisions for anonymity.
Whistleblowers do not need to be U.S. citizens to obtain an award reward. There have been several international cases where foreign whistleblowers have been awarded for reporting illegal activity, such as our client Bradley Birkenfeld, an international banker who blew the whistle on offshore accounts held in Switzerland by U.S. citizens and was awarded $104 for his information.
Since 2007, the Whistleblower Office has made awards of $1.1 billion based on the collection of $6.6 billion with significant improvements to their whistleblower program on the horizon. To learn more about this program, read our FAQ IRS Whistleblower Program: An Overview of Protections, Rewards, and Reporting.
Next Steps? Contact the IRS
If you’re an insider with information regarding an abusive micro-captive insurance scheme, and would like to blow the whistle, you can complete IRS Form 211, Application for Award for Original Information, with the Whistleblower Office.
However, keep in mind, due to the complex nature of such schemes, we strongly suggest you speak with a whistleblower attorney who specializes in tax-related cases to increase the likelihood of your case being picked up by the IRS and for you to receive the maximum award possible.
Our Firm Can Help
If you’re seeking legal assistance, get in touch with our firm today for a free and confidential case evaluation. In most cases involving abusive micro-cap insurance schemes, our whistleblower attorneys work on a contingency basis, meaning we only get paid if we help you win your case.
Our Firm’s Cases
$112.6 Million Award
Confidential Whistleblower’s disclosures resulted in 461 tax cheats paying over $562.9 million in fines and penalties. Whistleblower obtained awards of over $112.6 million. Client’s disclosures expected to trigger millions in additional awards and sanctions in 2024.
$11.9 Million Award
In July 2023, our client was awarded a significant sum of $11.9 million due to their involvement in the Tax Whistleblower Award Case No. 2015-11701. The IRS’s program for whistleblowers is a crucial mechanism that incentivizes individuals to spotlight tax fraud.
$11.9 Million Award
July 2023, our client obtained an award of $11.9 million in Tax Whistleblower Award in Case No. 2015-11793. The IRS whistleblower program offers substantial financial rewards to individuals who expose tax fraud.
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