What I Learned from a Senior IRS Attorney
From filing extensions to microcaptive insurance, here’s what the IRS may want physicians to understand about compliance and complex tax strategies.
As a tax strategist, I constantly dissect, evaluate, and determine the legitimacy of every strategy I recommend—because reputation and credibility matter. Understanding how the IRS views different tax strategies has become central to my growth as a tax planner. After all, they are the final judge of what’s acceptable and what’s not.
I recently had the privilege of spending an hour in conversation with Melinda Fisher, a senior attorney from the IRS Chief Counsel’s office in Denver. She represents the IRS in court and trains other attorneys on tax procedures and compliance standards—including what counts as a legitimate strategy, and what crosses the line.
The conversation was packed with insight. I walked away with several key takeaways for physicians—ranging from common-sense compliance tips to more complex strategies that toe the IRS “safety” line.
Three Things Melinda Wishes More Physicians Knew
1. Basic Compliance: The Fundamentals
Before diving into advanced strategies, I asked Melinda what she wishes more physicians understood about tax compliance.
Her answers were refreshingly simple—but absolutely critical:
File an extension.
“Just file the extension,” she said. Filing a extension online, something that takes less than five minutes, can help busy physicians who do not have all the necessary forms (like delayed K-1s) avoid the failure-to-file penalty, which is 5% of your unpaid tax bill per month, up to a maximum of 25%. (Just remember: it gives you more time to file, not more time to pay.)
Make your estimated quarterly tax payments.
She mentioned this as another simple but crucial way to stay compliant. Failing to do so could result in an estimated tax penalty. I was reminded how important this is for physicians earning 1099 income on the side - like me. When I first started my side-gig, I completely overlooked this requirement because I was used to W-2 withholdings being handled automatically by my employer. So for those doing side work, her advice was clear: set aside funds and pay your estimated taxes quarterly.
Work with someone who has credentials, experience, and a solid reputation.
Not all tax advisors are created equal. Melinda emphasized that while titles like CPA, EA, or JD are important, they don’t automatically mean someone is the right fit. It’s just as important to look at a professional’s track record, experience, and—most importantly—their reputation.
These may seem basic, but Melinda made it clear: ignoring them is often what gets people into trouble.
2. Leveraged Charitable Donation Strategies
Next, we moved into more sophisticated territory—starting with leveraged charitable donations.
This idea has been around for decades. In essence, a taxpayer donates property to a qualified charity under IRC §170 (the section that governs charitable deductions). What makes it “leveraged” is the valuation: someone might invest $1 into acquiring a property, but claim a $4–$5 fair market value at the time of donation.
Here’s how it might work in real life: A physician invests $50,000 in a partnership that promises a $200,000 charitable deduction through a land donation. In a 40% tax bracket, that’s potentially $80,000 in tax savings—on paper.
Here’s the IRS perspective:
"Kenny, I always caution people that if something sounds too good to be true, it probably isn’t true,” Melinda said.
She elaborated that if a property’s value suddenly increases—without improvements, development, or clear market justification—it raises red flags. These cases almost always trigger audits, especially when the deduction amount is substantial.
That said, not all leveraged donations are disallowed, she added. If the intent behind the donation is genuinely charitable and the valuation is supported with strong documentation, the IRS may be more lenient.
Key takeaway: Intent and documentation matter. If you would have donated the property regardless of the tax benefit—and your valuation holds up under scrutiny—your chances of IRS acceptance are much higher. Each case is reviewed individually.
3. Microcaptive Insurance Arrangements
We then discussed the controversial—but potentially powerful—strategy, involving microcaptive insurance companies, governed by IRC §831(b). This tax provision has been around over 40 years.
Microcaptives are a form of insurance company created by small businesses to insure risks that commercial insurers may not cover—such as cyberattacks, the loss of a key employee (i.e., a rainmaker), or disruptions to business continuity. A business owner can set up a small insurance company, pay premiums to it, and deduct those premiums as business expenses.
For example, a group of plastic surgeons might form their own insurance company to cover the risk of losing their star surgeon. To spread the risk, they might join forces with other medical groups—orthopedic, family medicine, dental—each contributing premiums into a pooled network of small insurance companies. In theory, it’s a legitimate risk-sharing mechanism.
But here’s the catch: If there’s no real risk transfer, no risk spreading, or no legitimate underwriting, the IRS sees it as a way to manufacture deductions—essentially moving money from one pocket to another.
Melinda made it clear: Microcaptives aren’t inherently abusive. In fact, Congress created them to address legitimate business risks for small businesses. But there are plenty of abusers. When they exist solely to reduce taxes—without meaningful risk or operational substance—they violate the doctrine of “substance over form”.
What does that mean?
It means the IRS looks beyond appearances and focuses on what’s really happening. If the true purpose of the arrangement isn’t to insure actual and plausible business risk - through risk transfer, risk pooling, and legitimate insurance underwriting contracts - then the structure will be seen as a tax avoidance tactic.
Key takeaway: Not all microcaptives are bad. But poorly structured arrangements that lack true insurance purpose and meaningful risks mitigation and spreading are under intense IRS scrutiny. The consequences? Disallowed deductions, interest, and steep penalties.
Final Thoughts
My hour with Melinda reinforced a principle I regularly share with clients: Intent, documentation, and integrity matter.
Her message to physicians was clear:
Get the basics right. File extension if needed, pay on time, and make estimated payments when required.
Be skeptical of strategies that seem too good to be true.
If you’re considering a leveraged donation or microcaptive arrangement, make sure it’s for the right reasons—to support a legitimate charitable cause or to insure risks that commercial carriers won’t cover while also meeting all risk mitigation and underwriting requirements.
Consult a qualified tax professional before signing onto anything complex.
The IRS isn’t looking to punish thoughtful, well-documented, properly structured tax strategies. But it will absolutely pursue those who cut corners or try to game the system.
If you’re exploring any advanced strategy, make sure your motives align with substance over form—and always work with professionals who know how to carefully and thoroughly evaluate each strategy.
Disclaimer: click here