2 TC Case Find That Captive Insurance is Did Not Qualify as Insurance

As we pointed out on May 10, 2023 in our post IRS Dirty Dozen List Targets 3 Schemes With International Elements the IRS has been targeting Foreign Captive Insurance as noncompliant with US tax rules.

In these transactions, U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legitimate insurance. The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered (or duplicative coverage of risks already covered by commercial insurance), excessive premiums indicative of non-arm’s length pricing and a lack of business purpose for entering the arrangement.

Where appropriate, the IRS will challenge the purported tax benefits from these types of transactions and impose penalties. The IRS Criminal Investigation Division is always on the lookout for promoters and participants of these types of schemes. Taxpayers should think twice before including questionable arrangements like this on their tax returns. After all, taxpayers are legally responsible for what's on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know and trust.

Now tax courts are green with the IRS and into recent holdings Jones et al. v. Commissioner, docket numbers 17165-19, 17169-19, 17177-19, 17178-19, 17187-19, 17201-19, 17205-19 and 17206-19, in the U.S. Tax Court and Farmers and Merchants Bancshares Inc. & Subsidiaries v. Commissioner, docket number 3394-25, in the U.S. Tax Court the Tax Court has held that the arrangements did not qualify as insurance.

In Jones, the court held that Shareholders in a California company cannot deduct their premium payments for insurance coverage from a captive insurer, the U.S. Tax Court ruled Tuesday, saying the arrangement did not constitute insurance for federal tax purposes. 

The ruling turned on whether the arrangement passed muster as insurance, the court said. Despite Sani-Tech's effort to meet the required risk distribution by pooling its risks with other, unrelated captives, the court found Clear Sky did not achieve risk distribution. There was a circular flow of money and the policies were not arm's-length contracts, the court said. Furthermore, Clear Sky was not operated as an insurance company, some of its policies were likely invalid and the premiums were unreasonable, the court said. 

In Farmers and Merchants Bancshares Inc. the court disallowed two years' worth of tax deductions tied to a reinsurance captive finding that the arrangement had no economic purpose other than tax avoidance.

The IRS warns anyone thinking about using one of these schemes – or similar ones – that the agency continues to improve investigation and enforcement in these areas by utilizing new and evolving data analytic tools and enhanced document matching.

Whether anchored offshore or in the U.S., abusive transactions and schemes remain a high priority for the IRS. 

The IRS also created the Office of Fraud Enforcement (OFE) and Office of Promoter Investigations (OPI) to coordinate service-wide enforcement activities against taxpayers committing tax fraud and promoters marketing and selling abusive tax avoidance transactions and schemes to effectuate tax evasion.

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The IRS ‘Reinstated’ 7,000 Workers, But They Are Not Returning To Work ?

On March 14, 2025 we posted Courts Order 6,700 IRS Employees to Be Rehired But They Can Still Be Properly Fired by May 15, where we discussed that two judges ordered federal agencies on February 14, 2025 to reinstate tens of thousands of workers with probationary status who had been fired across 19 agencies as part of President Trump’s government-gutting initiative. 

“The Court has read news reports that, in at least one agency, probationary employees are being rehired but then placed on administrative leave en masse,” the order said. “This is not allowed by the preliminary injunction, for it would not restore the services the preliminary injunction intends to restore.” Both judges ordered that the agencies offer to reinstate any probationary employees who had improperly been terminated. Neither order was a final decision in the case.  

Now according to The Tax Adviser,  the federal government will pay about 7,000 IRS probationary employees, who were laid off less than a month ago, not to work while lawsuits over layoffs wind their way through the court system, the agency said in an email.

Acting IRS Commissioner Melanie Krause said in the email sent to all IRS employees that the probationary workers, who were laid off Feb. 20, would be reinstated and placed on administrative leave until further notice.

The Email Sent To Probationary Workers Advised
Them “Not [To] Report To Duty Or Perform Any Work
Until Receiving Further Guidance.”

The email cited an order from a U.S. District Court judge in Maryland that 18 federal agencies, including Treasury, reinstate “certain probationary workers” at least temporarily.

Probationary employees who sought details about the administrative leave received a second email that said the workers will receive back pay and that all benefits, such as life insurance and health, vision, and dental coverage, will be reinstated. Meanwhile, other job losses loom at the IRS, Krause’s email said.

The Trump administration wants to cut the IRS workforce by 20% by May 15, including those who have already left or were fired.

Officials at the Elon Musk-led group advising the administration want Acting IRS Commissioner Melanie Krause to eliminate 18,141 jobs across the agency. This includes the roughly 12,000 employees terminated as part of new-hire layoffs.

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TC Determines That Taxpayer's Debt Was 'Seriously Delinquent' Even after He Paid Tax to Reduce Balance below $50,000

A Florida man's tax debt was property certified by the Internal Revenue Service as "seriously delinquent" and reported to the U.S. secretary of state to bar him from obtaining or renewing a passport, the U.S. Tax Court said on March 18, 2025.

Drew J. Pfirrman filed his 2018 federal income tax return, on which he reported no tax due. 

The IRS later concluded that he had received $367,628 in unreported income stemming from dividends and the disposition of certain securities. In late 2020 the IRS sent a Notice CP2000 to Mr. Pfirrman that proposed an income tax adjustment of $111,460, as well as an accuracy -related penalty of $22,292 and statutory interest of $10,124. These amounts were assessed on February 15, 2021.

In March 2023 the IRS sent Mr. Pfirrman, at his last known address, a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the U.S. Department of State (Notice of Certification). At that point Mr. Pfirrman's assessed liability totaled $182,687. 

The Notice of Certification advised Mr. Pfirrman that the IRS had made a section 7345 certification with respect to his unpaid 2018 tax liability, that the State Department had been notified of the section 7345 certification, and that the State Department could revoke his passport or refuse to issue him a new passport based on the section 7345 certification.  Mr. Pfirrman petitioned this Court under section 7345(e).

On the record at the time of certification Mr. Pfirrman's liabilities met the statutory definition of "seriously delinquent tax debt." Mr. Pfirrman has not claimed that either of the statutory exceptions apply. See Adams II, 122 F.4th at 434. It is uncontested that the IRS served Mr. Pfirrman with notice of its collection actions and his administrative rights over multiple years. 

Mr. Pfirrman took no action to timely contest the tax liens or underlying deficiency determinations. 

Only Much Later, after His Passport Was In Jeopardy,
Did He Attempt To Dispute The IRS Collection
And Enforcement Actions.

Section 7345 plainly forecloses such an eleventh-hour collateral attack on a person's underlying tax liabilities. Mr. Pfirrman's Remaining Argument, in addition to questioning his underlying tax liability. 

Mr Pfirrman Also Suggests That He Has Made
Payments That Have Dropped The Liability
"Below The Threshold of This Court Review."

Mr. Pfirrman misunderstands the statutory structure. 

Once a certification of a seriously delinquent tax debt has been made, it may be reversed "if the debt with respect to such certification is fully satisfied." I.R.C§ 7345(c)(1) (emphasis added). 

Unless a taxpayer satisfies the section 7345(b)(2)(A) exception, a partial payment does not justify reversal of a certification or otherwise end the matter, even if the partial payment drops the amount of the unpaid, assessed, and legally enforceable liability below the 20 23 threshold for certification of a seriously delinquent tax debt. 

The Court held that the certification of Mr. Pfirrman as a taxpayer owing a "seriously delinquent tax debt" was not erroneous and granted summary judgment for the Commissioner.

If You Have Serious Delinquent IRS Debt, You Should Consult with Experienced Tax Attorneys, As There Are Several Ways Taxpayers Can Avoid Having the IRS Request That the State Department Revoke Your Passport. 

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Hialeah, Florida Tax Preparer Sentenced To Prison For $20M Fraud

According to Law360, a Miami-area tax preparer was sentenced to nearly five years in prison after admitting to filing thousands of individual tax returns wrongly claiming energy credits, resulting in a $20 million loss for the Internal Revenue Service, according to the U.S. Attorney's Office for the Southern District of Florida.

Beatriz Toledo, 61, of Hialeah, Florida, received her sentence during an appearance before U.S. District Judge David S. Leibowitz in Miami federal court after previously pleading guilty to three counts of aiding and assisting in the preparation of false tax returns as part of a deal with federal prosecutors.

Southern District of Florida prosecutors said in a statement released Friday that a federal judge in 2010 issued a permanent injunction barring Toledo from similar conduct. In exchange for pleading guilty to the three charges in December, prosecutors agreed to dismiss 12 additional charges of preparing false tax returns and one contempt of court charge.

In the April 2024 indictment against Toledo, prosecutors said she resumed filing false tax returns through her company, Immigration and Tax Service Group LLC, despite the injunction. Between 2017 and 2021, Toledo allegedly prepared about 7,800 false tax returns that fraudulently claimed the residential energy credit, which gives taxpayers a credit for qualifying energy-saving expenses incurred from improvements to their homes. 

When preparing and filing the returns, Toledo listed her company as the official tax preparer, knowing that she was prohibited from filing false tax returns because of the injunction, prosecutors said.

A factual proffer filed in December said more than 10 individuals were interviewed by law enforcement and all said no energy-saving improvements were made to their homes and they had never spoken to Toledo about the credit. In addition, the individuals said "large sales tax and business expense deductions" listed on their returns were inconsistent with their actual finances, according to the proffer.

As a result of filing the false returns, Toledo made about $7.1 million that she took directly out of her clients' tax refunds.

The government filed a memorandum on March 13 urging the court to impose the high end of a sentencing range between 46 months and 57 months due to Toledo's "pervasive history of fraud" and the "sophistication or extensiveness" of her scheme.

Before her injunction, in the late 1990s, Toledo was tried for money laundering but was acquitted of all charges.

"If ever a case calls for it, this one does," said Will J. Rosenzweig of the U.S. Attorney's Office for the Southern District of Florida, representing the government, in his memo.

In her sentencing memo filed on Monday, Toledo acknowledged the injunction but "vehemently" denied preparing any fraudulent tax returns and also said it was improper for the government to use her money laundering trial to advocate for a harsher sentence.

Toledo also asked the court to go easy on her due to health reasons, citing significant health problems stemming from brain cancer years ago, no criminal history and a 93-year-old mother she resides with who depends on her. Toledo asked for probation with 12 months of home confinement.

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How Not to Make a Voluntary Disclosure - Inaccurate Filing Leads to Federal Prosecution

According to DoJ, on March 21, 2025 a federal grand jury in Miami returned an indictment charging Dan Rotta, of Aventura, Florida, and Sergio Cernea, of Sao Paolo, Brazil, with conspiring to defraud the United States by concealing income and assets in Swiss bank accounts. The indictment also charged Rotta with tax evasion, filing a false tax return, making a false statement and failing to file Reports of Foreign Bank and Financial Accounts. Rotta was arrested on a related criminal complaint on March 8, 2024.

According to the indictment, between 1985 and 2020, Rotta hid more than $20 million in assets in at least two dozen secret Swiss accounts at five different Swiss banks, including UBS, Credit Suisse, Bank Bonhôte and Bank Julius Baer. The accounts were allegedly held in his own name, in the names of sham structures and, in one instance, a pseudonym. Over the years, Rotta allegedly earned substantial income from these assets that he did not report on his tax returns.

From 2001 through 2017, Rotta allegedly falsely represented to the banks that he was a Brazilian citizen residing in Brazil, even though he had been a naturalized citizen and resident of the U.S. since the 1970s. During those years, Rotta and a company he controlled allegedly received millions of dollars in transfers from his secret Swiss accounts. 

According to the indictment, in 2011, after the IRS obtained records related to one of Rotta’s Swiss accounts, Rotta nominally changed the documentation of his accounts at Credit Suisse and Bank Bonhôte to make it appear that Sergio Cernea, a Brazilian national, owned the assets in the accounts. Despite the change, Rotta allegedly continued to control the assets and transferred millions of dollars out of those accounts for his use. Shortly after Rotta changed the account documentation, the IRS allegedly began auditing Rotta. 

During the audit, Rotta allegedly falsely denied that he owned the assets in the foreign financial accounts and, instead, claimed that the millions of dollars he withdrew from the accounts were non-taxable loans from Cernea and others. 

Rotta Allegedly Provided The IRS With Fake
Promissory Notes And False Affidavits
From Cernea And Others To Corroborate His Claims.

The IRS allegedly did not believe Rotta and assessed millions of dollars of additional taxes as well as penalties and interest against him. According to the indictment, Rotta sought to reverse the assessments by causing the filing of a U.S. Tax Court petition that sought a redetermination of the IRS’s assessments.

 In that petition, Rotta, through his attorney, allegedly falsely denied having any foreign accounts and attached the fictitious loan documents. Furthermore, Cernea and another co-conspirator allegedly traveled to the United States to retell the false loan story to IRS attorneys. In 2017, after Rotta allegedly presented evidence that the purported loans had been repaid, the IRS reversed the deficiencies and agreed that Rotta owed no additional tax. 

Unbeknownst to the IRS, however, the funds that Rotta purportedly repaid to Cernea and others allegedly went into accounts that Rotta controlled. 

According to the indictment, as part of the conspiracy, in 2016, Rotta had attorneys create trusts in the United States that Cernea funded with the assets transferred from the Swiss accounts and held for the benefit of Rotta. In fact, the funds in the trusts allegedly belonged to Rotta, and Rotta controlled the trusts. 

In 2019, Rotta allegedly became aware that the IRS would receive additional account records from Switzerland that contradicted the false claims that he had previously made. To avoid criminal liability, Rotta allegedly applied to participate in the IRS’s voluntary disclosure practice. Under that practice, taxpayers who willfully do not comply with their tax and reporting obligations can make timely, accurate and complete disclosures of their conduct, which may be a way to resolve their non-compliance and limit their criminal exposure. 

According To The Indictment, Rotta Made A Number Of
False Statements In His Submission, Including Falsely
Claiming The Assets In The Swiss Accounts Mostly
Belonged To Cernea And That Cernea Was Providing
Rotta With Millions Of Dollars Because Cernea Had
No Children When, In Fact, Cernea Had Two.

His attorneys helped him apply in 2019 for an IRS amnesty program that offered reduced penalties and promised no prison time in exchange for voluntarily disclosing hidden foreign bank accounts. Although Rotta made the required disclosures and the IRS initially told him he had been accepted into the program, the agency later stopped responding to his attorneys' requests on the status of his participation, he said. As it turned out, Rotta had been secretly kicked out, he said.

The IRS didn't tell Rotta or his attorneys for a year that Rotta had been removed from the amnesty program, actively misleading them, Rotta said. The agency additionally executed a secret search warrant for Rotta's email account, which he used to communicate with his attorneys.

The DOJ subpoenaed Rotta's attorneys for testimony and documents, claiming that the crime fraud exception pierced the normal attorney-client privilege and work product doctrine, and the court agreed in an April order requiring the production.

In a hearing before U.S. District Judge Rodney Smith of the Southern District of Florida, Dan Rotta, 78, a retired jewelry and watch importer, pled guilty to one count of conspiracy to defraud the United States.

He faces up to five (5) years in prison and a fine of up to $250,000. Judge Smith set Rotta's sentencing for June 4.

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