IRS Notice 2017-67: Penalty Relief and Disclosures
Learn how IRS Notice 2017-67 provided a limited waiver for disclosure penalties without affecting the tax treatment of the underlying transaction.
In January 2025, the Internal Revenue Service (IRS) released final regulations that designate certain micro-captive arrangements as “listed transactions” and others as “transactions of interest.” Following this, the IRS issued Notice 2025-24, creating a temporary window for individuals and businesses to report their participation in these transactions and avoid certain penalties for previous disclosure failures.
The Underlying Transaction
The arrangements in question are micro-captive insurance structures. A micro-captive is a small insurance company created to insure the risks of a related business. Under Internal Revenue Code Section 831(b), these small insurers can elect to be taxed only on their investment income, provided their premium income does not exceed $2.85 million for 2025.
The IRS became concerned that some businesses were using these arrangements to improperly reduce their taxable income. In a problematic transaction, a business pays deductible premiums to its micro-captive for coverage that may be unnecessary or overpriced. The micro-captive receives the premium income tax-free under its election, converting the business’s ordinary income into untaxed funds. Due to this potential for tax avoidance, the IRS requires participants to disclose their involvement by filing Form 8886. The 2025 regulations classify the most aggressive versions of these structures as “listed transactions,” which are subject to stricter rules than those deemed “transactions of interest.”
Eligibility for Penalty Relief
Notice 2025-24 establishes clear criteria for taxpayers who can qualify for the penalty waiver. This relief is available to participants, including individuals, trusts, partnerships, and corporations, with a direct or indirect interest in one of these arrangements. To be eligible, a taxpayer must have had an obligation to file Form 8886 for one or more taxable years but failed to do so. The relief is intended for those who have not yet been contacted by the IRS for an income tax examination for the years in question. If a taxpayer is already under audit for their involvement in a micro-captive transaction, they are generally not eligible.
Required Actions for Claiming Relief
The process for claiming relief is specific and time-sensitive. Taxpayers must prepare and file a complete and accurate Form 8886 for each tax year they participated in the transaction and failed to disclose it. Taxpayers seeking this relief must file the required forms by July 31, 2025. Form 8886 must be filed with the Office of Tax Shelter Analysis (OTSA), and a copy must be attached to the taxpayer’s relevant tax return.
Scope of the Penalty Waiver
The primary penalty waived is the one imposed under Internal Revenue Code Section 6707A for failing to report a transaction. For a “transaction of interest,” the maximum penalty is $10,000 for an individual and $50,000 for other entities. For a “listed transaction,” the penalties are significantly higher, with a maximum of $100,000 for an individual and $200,000 for other entities.
The relief applies exclusively to the penalty for the failure to disclose; it does not absolve the taxpayer of any underlying tax liability. If the IRS later examines the micro-captive arrangement and determines it was an improper tax avoidance scheme, the taxpayer would still be liable for any back taxes, interest, and other applicable penalties.