Ultimate Guide to Tax Audit Insurance
Tax audit insurance is a term that gets thrown around, but what does it actually refer to? Are there different types? What should one look for in a policy?
1. What is tax audit insurance
Tax audit insurance is a type of insurance specifically designed to manage the potential costs - namely professional fees - that could result from the need to respond to an official tax investigation.
The Australian Tax Office could initiate the tax investigation, as could the State Revenue Offices or other governing bodies and agencies. All of them are charged with ensuring the taxpaying entity is meeting taxation and compliance obligations.
It is worth noting that the term ‘tax audit’ may refer to an actual audit as well as the preliminary stages of inquiry that an auditing body can undertake. For example, the tax audit might be a review, a questionnaire, a request for information, phone calls, meetings with the government agency, etc. In short, the preparation can be demanding and time-consuming for the accountant or other professionals. Remember, ‘professional fees’, depending on the policy, may include the fees of other specialists.
The time investment needed to prepare a response adequately can add up quickly. Since an investigation is typically unforeseeable, these costs may surprise you (and your accountant). Although the ATO can resolve some inquiries in hours, others can end up as long, drawn-out processes costing time and resources, for which you’ll inevitably have to pay.
Your particular policy coverage will vary from one insurer to another, but some of the usual professional fees covered include the following:
- Financial Advisors
- Tax agents
2. What is not usually covered
Tax audit insurance is designed to cover policyholders for the fees they may incur from their accountant (or other professional) when resolving an official tax inquiry.
This does not usually include the following:
- The tax shortfall (what is still owing)
- Any fines and penalties imposed on you or your business
- The policyholders’ time or wages spent during the audit
- Opportunities (new business) missed due to the audit event
- Any wages of your employees
- Non-tax agent lodged tax returns
As you can tell, tax audit insurance is not without nuances, and the cost often hinges on the scope of coverage and the cover limit received. For instance, you may ask what government agencies are covered. What level of investigation? What about other professionals? How about the costs of preparing a claim?
Accountants, bookkeepers, and other tax agents alike rely, for the most part, on the accuracy of the information they’re given. The taxpayer must ensure that this information is sound, that income has been declared, and that expenses are equally documented.
The benefit of tax audit insurance is protection against the cost of professional fees incurred from time spent responding to and resolving the ATO or State Revenue Office (SRO) investigation. Always review the policy wording exclusions to understand what is and is not covered under your tax audit insurance policy. Exclusions may include fraud, dishonesty, late lodgement, or tax returns prepared or reviewed by anyone other than a registered tax agent.
3. Who is tax audit insurance for
The level of risk in receiving a tax investigation of some form will depend on many factors. If you are an individual salary earner with no other income or investments, the chances become pretty low. However, the risk is higher if you have a portfolio of investment properties.
Generally, any tax-paying entity can receive audit attention. Nonetheless, groups of entities will invariably receive more attention. In terms of whom tax audit insurance serves most, the answer depends on the tax audit insurance product itself.
In terms of entity types that may look to get tax audit insurance, your most common categories will be:
- Private companies
- Sole traders
- PAYG Salary earners
- Private groups that include multiple entities
4. Most Common Triggers of Tax Audits
Any number of things can trigger an audit, but some common reasons include the following:
Leaving income out
- Truthfully declaring what you’ve earned is your responsibility. Omitting income is a surefire way to grab the attention of the ATO.
Adding income in
- Even if justified, significant changes in your income might look a little fishy.
Claiming too little, too much, or for the wrong things
- You earn a minimum wage but drive a fancy car and own a house in Vaucluse. The auditing bodies have a nose for this sort of thing, so they will likely want to take a closer look…
- It’s cliche but true—almost automatic ATO interest and potential involvement.
Not lodging your tax returns on time
- Sticklers for deadlines, the ATO hates it when things are late. In response to your delay, they may investigate what’s been going on.
Not paying enough toward superannuation
- If you’re not paying enough towards your employees’ superannuation, or if you’re late with your payments, you may draw the attention of the ATO. It might start as a simple review but could quickly escalate to a full-blown tax audit.
- We’re all human, but errors (big or small) will often attract scrutiny from the ATO.
It is important to note that the ATO sometimes conducts random and ‘covert’ audits, particularly given they’ve been so quiet throughout Covid. So regardless of whether or not you think you are ‘at risk’, it’s essential to consider ways and means to protect yourselves.
5. Common Tax Audit Insurance Claims
We all know that the ATO is becoming increasingly assertive post-Covid, and has its hand in many audit pies. Increased audits translate to increased audit insurance claims. Here are some common tax audit insurance claims:
- This can be further categorised into PAYG, SG, and FBT.
- Not submitting statements correctly or on time has increased BAS audit activity.
- Many individuals don’t realise that records are required to be kept for five years, and many don’t keep their records for five years…
Taking notes from the ‘top 500’ playbook, these audits primarily focus on justification for:
- Recharacterising assets and expenditures as revenue or capital
- Moving wealth around (e.g., into trusts or SMSFs)
- Accessing or applying concessions
- International tax activity
- Data sharing with government bodies (through iCare, ATO, WorkSafe, etc.) has effectively targeted organisations for investigations or enquiries.
The ATO will be taking a keen interest in:
- work-related expenses
- rental property income and deductions
- capital gains from cryptocurrency, property, and shares
If you’re wanting to protect against the potential fees you may incur in the event of a tax audit, you may wish to consider tax audit insurance with AuditCover. If you’d like more information, feel free to request a call-back with our team and we’ll be happy to assist.