In part one of this interview, Physicians Practice associate editor Erica Sprey spoke with Philip Garrett Panitz, a tax attorney based in Westlake Village, Calif., about the benefits of physician-owned captive insurance companies. In part two, Panitz discusses the potential risks in creating this type of insurance vehicle.
ES: What potential risks are attached to captive insurance companies?
PP: The real true risk is that the IRS is very skeptical about these arrangements and has challenged them on a regular basis. And these cases have gone to court. And the cases where the taxpayer has won, let's say in the case where the doctor has won, is if every "I" is dotted and every "T" crossed, where there is real insurance, where there is risk shifting and risk distribution, and the United States Tax Court has ruled that in fact this is real insurance. And all the requirements to be insurance have been met. And the IRS has lost those cases. But that hasn't dissuaded the IRS from attacking those arrangements and look for new ways to attack them.
I represent a number of tax payers who are under scrutiny by the IRS. That is why I got involved in this in the first case, because they came to me and said "We are under audit by the IRS, they are looking into our captive insurance companies, and so we are litigating against the IRS on those." So there are two ways that I can help tax payers. One, is if they are already under the audit process and I come in and help them in that regard. And two, help them set up the actual captive insurance arrangement. We do it in a way that complies with all the IRS rules in this area.
ES: Should a physician contact a tax attorney who is experienced in this type of vehicle?
PP: Yes absolutely. So that we can set it up with the minimization of the risk. But I have to tell you that because the IRS is scrutinizing these, the IRS has the goal of looking into almost every captive insurance arrangement to make sure these are done right, because they are highly skeptical about them. One of the reasons that they are, and it is a valid reason for the IRS to look into it, is there have been tremendous amounts of abuse. So if a doctor is going to do this, he really needs to make sure he does it right. Because there are a lot of unscrupulous promoters out there that set up these captive insurance companies and unfortunately are perhaps overly aggressive and don't do things right. [So] the IRS has good reason to look into this.