Correct Tax Returns Speed Up Refunds

Published March 28, 2025

On March 24, 2025, the Internal Revenue Service (IRS) reminded taxpayers that they can improve the probability of a prompt refund by filing a correct tax return. The IRS offered tax tips on the best ways to ensure a speedy refund.

1. Tax Paperwork – Taxpayers should gather all their tax documents. The basic documents are IRS Form W-2’s, Form 1099’s and other information forms. There may be specific paperwork to support income tax deductions, education credits or mortgage interest payments. It is helpful to have the adjusted gross income (AGI) from your prior year tax return if you plan to file electronically. You can use an IRS Individual Online Account to view a Form W-2, Wage and Tax Statement or Form 1095-A, Health Insurance Marketplace Statement. These are under the Records and Status tab in your IRS account.
2. Names, Birthdates and Social Security Numbers (SSNs) – You must provide the correct name, date of birth and SSN for each dependent. Your name should be entered exactly as it appears on your Social Security card. If a dependent does not have an SSN, you can request an Individual Tax Identification Number (ITIN).
3. Electronic Filing – The IRS recommends you reduce math errors by using electronic filing. This might include IRS Free File, Free File Fillable Forms or Direct File. Your online tax software may highlight your potential tax credits or deductions. It also will check your return and prompt an entry if you have failed to include important information. If you choose to submit a paper tax return, you must be certain that you have the correct mailing address for the IRS. You can find the mailing address on IRS.gov.
4. Taxable Income – The majority of income is taxable. If you do not report your taxable income, you could be required to pay interest and penalties. Income includes interest earned from financial accounts, unemployment benefits, income from services or the gig economy and sale of digital assets.
5. Digital Assets – All taxpayers are asked on their tax return to answer either "Yes" or "No" to a digital asset question. You must answer this question even if you have not bought or sold digital assets in 2024. If you have a digital asset transaction, you should visit the Digital Assets webpage on IRS.gov.
6. Bank Routing and Account Numbers – Most taxpayers request an electronic transfer of their refund into a bank account. You should check to be certain you have the correct routing and account numbers. These are on the lower portion of a check. The routing and account numbers are also available on some prepaid debit cards. This is an option if you do not have a bank account.
7. Sign and Date – If you have a joint tax return, both spouses must sign and date the return. If you are filing electronically, you will need to authenticate the tax return by including your adjusted gross income from the prior year.
8. Tax Payments – Tax payments are due on April 15. Individuals in a federally declared disaster zone usually receive additional time to file. You may make payments using the Individual Online Account, Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or through a debit or credit card.
9. Tax Filing Extension – Taxpayers may request a six-month extension for filing until October 15, 2025. You can pay using one of the online payment options and check the box requesting an extension. You can file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return or request an extension through IRS Free File. The extension allows extra time for filing but is not an extension of time to make your tax payment. The exception to this rule is a limited number of individuals who are in a federally declared disaster zone.

Microcaptive Insurance Plan Not Qualified

In Genie R. Jones et al. v. Commissioner; No. 17165-19; No. 17169-19; No. 17177-19; No. 17178-19; No. 17187-19; No. 17201-19; No. 17205-19; No. 17206-19; T.C. Memo. 2025-25, the Tax Court reviewed a microcaptive insurance arrangement. The Tax Court determined that the insurance entity did not distribute risk, there was a circular flow of funds and it lacked an arm’s-length contract. Therefore, the program was not qualified as insurance and the Internal Revenue Service (IRS) denied deductions for payments of premiums and amounts received by the insurance entity.

Taxpayers were shareholders of Sani-Tech West, Inc. (STW), a subchapter S corporation located in Camarillo, California. From December 2015 to December 2016, STW participated in a captive insurance plan with a premium paid to Clear Sky Insurance Co., Inc. (CSI), a captive insurer incorporated by STW’s executive officers in Montana. STW claimed an ordinary and necessary deduction of $813,256 for the insurance premium. CSI claimed under Section 831(b) that the payments were for insurance and therefore excluded from its income. The IRS audited both entities and denied the deductions.

The essential issue was whether the CSI program constituted "insurance" under the federal tax law.

Richard Shor founded STW in 1992 and was joined by Sherry Maxson. STW produced high-purity process components for the pharmaceutical industry. STW established SaniSure, Inc. as a subsidiary to manufacture pre-sterilized products.

In 2014, the claimed product loss was $117,000. STW determined that this loss showed a need for insurance. It contacted John Capasso of Captive Planning Associates (Planning Associates) to discuss a captive insurance plan. Planning Associates recommended hiring Marn Rivelle of Rivelle Consulting Services to do an actuarial review and recommend coverage. Because STW did not have a significant claims history, the actuary had to estimate coverage. The draft feasibility study recommended 23 different insurance policies and approximately $1.1 million in premiums. The expected loss was projected to be $520,000 per year.

STW moved forward with the plan in 2015. It also maintained traditional commercial insurance through Hartford and later with the Sentry companies. STW paid a premium of $813,256 on December 31, 2015. The policy included 15 different coverages and the Montana Commissioner of Securities & Insurance issued a Certificate of Authority to CSI.

Because CSI did not have a normal insurance pool, STW decided it should reinsure the risk with OMNI Insurance Co. (OMNI) in a risk pool participation agreement. The OMNI risk pool required an insurance premium of $409,693.

Because Shor was planning to acquire a new building in Camarillo, he requested a loan from CSI. A $400,000 loan was approved by the Montana Commissioner of Securities.

While microcaptive insurance is generally maintained for five to ten years, Shor and Maxson were receiving offers to purchase STW. They decided to terminate the CSI program after one year.

The IRS audited both STW and CSI and determined the insurance was not qualified and assessed approximately $800,000 in deficiencies against the various owners of STW.

The Tax Court noted the primary issue was the qualification of the CSI program as insurance. The Tax Court considered four nonexclusive factors. Under that test, "An arrangement constitutes insurance for federal income tax purposes only if (1) the arrangement involves an insurable risk of loss; (2) the arrangement shifts the risk of loss from the insured to the insurer; (3) the insurer distributes the risk of loss among its policyholders; and (4) the arrangement is insurance in the commonly accepted sense."

The Tax Court determined CSI did not distribute the risk of loss and there was no insurance in the commonly accepted sense.

Insurance is based on the assumption of multiple covered risks, and the risk of loss is spread around among several entities. Because CSI was a single entity with STW as the sole insured, the decision was made to include the OMNI reinsurance pool to attempt to qualify as insurance. However, there was a circular payment because the reinsurance premium of $409,693 paid to OMNI was returned (less a deposit and modest fee) within four days to CSI. In addition, the arrangement with OMNI required it "to go hat in hand to the participating captives to cover cash shortfalls, despite [its] inability to force any of the participating captives to pay more money into the pool to cover the claim."

In essence, this was not an arm’s-length contract. During the years 2011 through 2016, the OMNI pool had a loss ratio of 0.2%. This loss ratio was approximately 1% of the traditional commercial insurance loss rate. Therefore, this was not insurance in the traditional sense.

The $400,000 CSI distribution to Shor was made without a loan application. The Tax Court determined this amount was not a bona fide loan and not likely to be repaid. Because there was no reasonable prospect for enforcing repayment, this was deemed a taxable dividend. Both deductions were denied to STW and CSI and Shor recognized taxable income of $400,000.

Editor's Note: This case is a good analysis of the basic requirements for a microcaptive insurance company. Both the IRS and Senate Finance Committee are looking carefully at microcaptives and will enforce a rigorous interpretation of the four required insurance factors.

IRS Staff Reductions May Impact Nonprofits

There is a major effort underway in Washington, DC to reduce the staff of many federal government organizations. These staff reductions may also affect the Internal Revenue Service (IRS).

Representative Rick Cohen of the National Council of Nonprofits (NCN), recently told Tax Notes, "I think cuts at the IRS are going to have a serious negative effect on a variety of things for nonprofits, going from all parts of the nonprofit life cycle."

The IRS issues exempt status rulings and is also tasked with regulating nonprofits. The IRS has responsibility for reducing waste, fraud and abuse in the nonprofit sector. IRS staff reductions may have a substantial impact on these functions of the IRS.

A major impact may be on the processing of IRS Forms 1023, the application for tax-exempt status. NCN has received multiple inquiries from organizations who have sought Section 501(c)(3) status. They are awaiting approval from the IRS and have been asking NCN if it has information on how long it will take to receive a response. Cohen noted, "When you have got fewer people there to process incoming forms and answer questions from people who are planning to submit a form…it makes it that much harder for them to get the information they need."

After an organization receives a favorable determination letter that approves its tax-exempt status, many nonprofit founders have additional questions. The organization may have questions about the board of directors, the process for incorporating under state law, the requirements for the articles of incorporation, bylaws and other issues.

If the IRS has fewer staff in the Exempt Organizations Division, it will be more difficult to obtain information. In addition, it is likely there will be fraudsters who create phony nonprofits and collect gifts from donors.

Cohen continued, "Any fraudster who gets into the nonprofit sector because the IRS does not have the resources it needs to do the oversight that it is tasked with only serves to harm the rest of the nonprofit sector that is operating ethically, efficiently, and doing all that they can to help people."

Editor's Note: While Cohen recognizes it is unusual for the nonprofit sector to ask for greater IRS enforcement, there are policy reasons why this level of regulation will have favorable benefits for legitimate charities. NCN is also hopeful that state charitable officials will be more active in regulating nonprofits within their respective states.

Applicable Federal Rate of 5.0% for April: Rev. Rul. 2025-8; 2025-15 IRB 1 (17 March 2025)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2025. The AFR under Sec. 7520 for the month of April is 5.0%. The rates for March of 5.4% or February of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”