IRS Nixes Dealers' Tax Shelter

An income tax dodge is how the IRS now regards the practice of dealers using off-shore reinsurance accounts to deposit customers' premium payments for extended warranty contracts and credit insurance policies.

An affected dealer says it's a legitimate tax shelter. But the IRS, in a November bulletin, rejects the position that foreign reinsurance companies receiving premium funds from dealers are tax-exempt if premiums do not exceed $350,000 a year.

The IRS position: “For federal income tax purposes, an insurance company is a company whose primary and predominant business activity is the issuance of insurance and annuity contracts or the reinsuring of risks underwritten by insurance companies…

“Exceptions are only available to a foreign corporation that is engaged in the insurance business.”

Many auto dealers “park” warranty contract and credit insurance policy premiums in offshore accounts maintained as “reinsurance” entities.

Deeming these accounts as taxable “will affect many dealers,” says Robert C. Zwiers, a tax expert with the Crowe Chizek CPA firm in Grand Rapids, MI.

A Kansas City domestic and import dealer, who asked not to be identified, said he has more than $100,000 in such an account. He believes the ruling should be appealed to a Federal Tax Court on grounds that it's legitimate.

“I was assured that the reinsurance company maintaining my account is engaged in proper activities in compliance with the IRS standards,” he says. “It is a legitimate shelter, not a sham or dodge.”

Most of the threatened tax-free accounts held for dealers are in Grand Cayman, Turcks and Caicos Islands.