Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
Tax audit insurance. What is it and do I need it?
Insurance for when the tax man cometh.
- KR Useful (1)
As a small business owner, keeping up with all the different types of insurance that are relevant to you and your company can sometimes feel like a job all on its own. There are a lot of different risks that are part and parcel of owning your own business and the options available to you in terms of insuring against those risks are seemingly endless.
In among all those business insurance options sits tax audit insurance, which is actually a relatively new concept in Australia and New Zealand — it’s only been around for about 25 years. You may already have tax audit insurance; you may have heard of it but might not be entirely sure what it entails or means for you; or you may not know what we’re talking about. If you slot into the latter two categories, then allow us to break down the basics for you.
So, what exactly is tax audit insurance?
If you are lucky enough to have avoided an audit, then it’s likely you live in fear of one day being subjected to the process. And if you have ever been unlucky enough to be audited, you will know that, even if you haven’t done anything wrong, the process of a tax audit can be an incredibly intimidating and stressful one that costs you dearly in time and money.
The whole point of tax audit insurance is, therefore, to insure you against the cost of professional fees that come with being audited, reviewed or investigated by a government organisation.
Where tax audits are concerned, “professional fees” relate mainly to the cost of employing accountants, lawyers, bookkeepers and other advisers (for example, actuaries, valuers, etc.).
As with all types of insurance, tax audit insurance has an agreed limit as to how much it will pay out in the event your business is subject to an audit.
What kind of costs are we talking about here?
As audits are entirely subjective, we can’t give you an exact estimate, but when we said tax audits were costly, we weren’t kidding. Your business is entirely responsible for footing the bill of an audit. You should also to bear in mind that these types of audits and investigations can sometimes take years.
The length of time an audit takes to complete obviously impacts the cost, but if even the most basic of queries can sometimes take a significant period of time to address (therefore racking up hourly fees), you can imagine that an audit or investigation that takes years to complete would leave you with an astronomical bill for professional fees.
It’s also important to note that even running a clean business doesn’t mean the cost of an audit will necessarily be lower than if you were taking some liberties and shortcuts here and there (which you obviously should not be doing). Sometimes you can be doing everything right and an audit will still be costly to your business.
How likely is it that my business will be audited?
We have some news we’re sure you aren’t keen on hearing: Tax audits are on the rise, particularly among small to medium enterprises.
So, while we can’t give you an exact indication of how likely it is your business will be subject to an audit, review or investigation, it’s safe to say that the chances of that happening have increased in recent years, particularly in light of the fact that government agencies have audit benchmarks they need to meet.
Are there any particular things I should consider if I choose to purchase tax audit insurance?
The answer to this question is a resounding yes. As with all types of insurance, there are some specific things you need to bear in mind when making a decision about which insurance provider to go with.
Where tax audit insurance is concerned, there are a few things you should be aware of:
- Not all tax office reviews are considered a “formal audit” where insurance is concerned. So, it’s possible you will have tax audit insurance in place only to find that you’re not actually covered for a particular type of audit being performed. So, if you choose to acquire tax audit insurance, make sure you are clear on what any prospective policy will actually cover you for.
- Just because you are the person taking out the tax audit insurance policy, doesn’t necessarily mean that you and your business are the ones covered by the policy. It defies logic, yes, but some tax audit insurance policies will actually insure your accountant instead of you and your business, which presents a whole range of issues. If you are looking into purchasing tax audit insurance, make sure that it is your business that is insured and not your accountant.
- Be wary of acquiring a tax audit insurance policy through your accountant as they often receive a commission from the insurance company. Of course, just because your accountant is receiving a commission from the insurance company, doesn’t mean there’s anything dodgy about the policy itself, but just make sure you are doing your due diligence.
So, should I get tax audit insurance?
Well, obviously, we can’t make that decision for you given any decision you make about whether or not to take out tax audit insurance will be entirely specific to your situation. Having said that, if peace of mind is something you crave, then tax audit insurance may very well be an appropriate option for you.
As always, before entering into an insurance contract, make sure you understand the intricacies of the policy so that when it comes time to claim, you aren’t left short-changed at best or essentially without cover at worst.