The US Government Accountability Office (GAO) has recommended that the Internal Revenue Service (IRS) clarify guidance on offshore micro-captive insurance audits and establish a formal review system for investigations.

In a recently released statement describing the findings of a GAO study into how the IRS conducts its enforcement of offshore insurance compliance issues, the GAO said that offshore insurance arrangements, including micro-captives, can be used to improperly claim tax benefits.

“We found that IRS could improve how it reviews its audits and investigations of such arrangements,” the GAO statement said. “For example, IRS managers have little guidance for when an audit should have a managerial review. IRS also could improve how it records and analyzes its quality reviews of investigations.”

So-called micro-captives, small captive insurance companies that elect to be taxed under section 831(b) of the Internal Revenue Code, which allows small insurance companies to be taxed only on their investment income, have been the target of IRS scrutiny in recent years.