In 2012, top executives at Paulson's hedge fund invested $450 million in a Bermuda-based reinsurer they'd set up known as Pacre Ltd. It has no employees, sells less insurance than industry norms, and invests almost exclusively in Paulson hedge funds.

Hedge fund manager Dan Loeb helped establish Third Point Reinsurance Ltd. in Bermuda, and David Einhorn's Greenlight Capital Re Ltd. is based in the Cayman Islands. Representatives from Third Point Re and from Validus Holdings Ltd., which is a minority investor in Paulson's Pacre, declined to comment on Thursday.

Short-Term Gains

Ordinarily, hedge fund managers' profits from trading are taxed as short-term capital gains at rates of up to 43.4%, plus state taxes. Insurance companies only have to pay taxes on their reserves when sold, giving the hedge fund investors the ability to defer taxes and pay at the lower rates — 23.8% — that apply to long-term capital gains.

The notice from the IRS doesn't use the word "loophole" and doesn't invoke the agency's authority to immediately stop what it sees as abusive transactions. Instead, the notice said the government is trying to "clarify" when "purported" reinsurance companies are really in the insurance business.

The IRS asked that comments be submitted within 90 days.

In June, Wyden pressed the Treasury Department to explain why hedge fund insurers continue to proliferate after the IRS promised a crackdown in 2003.

Claims Costs

The U.S. sought to target firms that have less of a focus on underwriting insurance risks, a distinction that can be complicated. Metrics that classify companies based on claims costs, reserves or investment income can be misleading because the figures fluctuate year-to-year based on financial markets and the frequency of hurricanes.

"Anyone that spent a day in our office would clearly see that we're a real insurance company," Chris Coleman, chief financial officer of Third Point Re, said at a conference in March.

Evan Greenberg, chief executive officer of Zurich-based Ace Ltd., cited the U.S. push to adjust tax treatment of insurers as an example of the "runaway regulatory environment" that he said is hurting an essential industry. Ace is starting a reinsurance venture in Bermuda with BlackRock Inc.

"Efforts to enact comprehensive tax reform may once again target taxation of foreign affiliate reinsurance used to efficiently manage risk and capital," wrote Greenberg in his most recent annual report to shareholders.

Greenlight Re climbed 0.1% to $30.34 as of 10:26 a.m. in New York trading. Validus was unchanged, and Third Point Re slipped 0.9%.

–With assistance from Doni Bloomfield in New York.