What is tax audit insurance, and what should I look for when choosing a provider?
Accountants around Australia will have come across numerous tax audit insurance providers in their time running a practice. Policies that are backed by larger insurance companies may present more prudent partnership opportunities, whereas those without may be riskier for the accountant.
How ATO Is Tackling The Problem
As an accountant, it makes sense to offer your clients tax audit insurance, particularly in light of the Australian Tax Office’s (ATO) aggressive ramping up of audit efforts, activities, and personnel. This mammoth task to close the growing $9 billion income tax gap has prompted accountants and other professional service providers to seek partnership with the right tax audit insurance provider. So who is the right provider, and what should professionals be seeking? After all, it is their professional fees that this type of insurance is supposed to cover.
In the new Covid-19 environment, where many Australians substantially depend on government schemes and welfare initiatives, the ATO is readying itself to audit unheard of numbers of businesses and individuals. Some reports suggest that up to 25% of taxpayers will receive an audit. These professional fees can very quickly balloon without a contingency plan in place. As a result of improved data-matching capabilities, the ATO is now incredibly efficient in identifying anomalies and potential breaches.
Keep in mind that the majority of individual tax returns will have at least one error. The types of mistakes vary, but of the roughly 70% that include inconsistencies, more than half of these relate to rental-property deductions, work-related claims, SMSFs, and misreporting within the cash economy. The key takeaway here is that the number of reviews, queries, investigations, and ultimately audits will increase substantially. Accountants should be ready to protect their clients with the right provider.
The costs of responding to an official audit may start as low as a couple of thousand dollars depending on the complexity of the audit and which other professionals must respond appropriately, e.g., a tax lawyer. These costs need to be worn by someone, whether the accountants themselves, the clients under investigation, or the insurance provider. Being unprepared for this kind of scenario can lead to a breakdown of the accountant-client relationship. In one potential situation, the accountant loses out by wearing these costs (out of fear that they’ll lose the fee-paying client altogether). In the other, the client pays and is caught off guard by “bill shock” sewing seeds of distrust or resentment into the relationship. In reality, these accountants were only doing their job at their billable rates.
In summary, having adequate tax audit insurance in place goes a long way. It is becoming a ‘must-have’ add-on for accountants and their portfolios.
So what’s available, and what is essential?
There are many tax audit insurance products on the market, and plenty of accountants are across these offerings, having already integrated them into their product mix to add value to their service. Typically the tax audit insurance solutions are facilitated through insurance brokerages with backing from larger insurers. Accountants and other financial advisers offering tax audit insurance to their clients (for a fee or not) should be cautious of quasi-insurance offerings that lack insurance backing. The blanket rule should always be to read the Policy Wording and discover who the insurer is and what the coverage includes or excludes.
Without proper insurance backing, the so-called tax audit insurance becomes largely ineffective and financially risky for an accountant to offer to clients. There is no transfer of risk to an external insurer, and so the insurance risk falls squarely on the practice. If the ATO or another government agency commences an audit, the accounting practice will wear all the risk with products that lack insurance backing.
Maybe you’re wondering who buys into shoddy tax audit insurance products. Often it is the temptation of an additional revenue stream that attracts an accountant to work with a tax audit insurance provider. The accountant will usually allow the tax audit insurance provider to manage and take the lead of the communications covering things like sales and compliance. Some providers use physical letters in their onboarding process. In contrast, others use digital forms of media to deliver their message and maximize uptake, such as email marketing.
Understanding Tax Audit Insurance Policies
In general, it is accountants benefiting most from offering tax audit insurance to clients, however other professionals looking out for clients in this regard include:
- Insurance brokers
- Financial planners
- Financial advisers
- Wealth managers; and
- Tax lawyers
In most cases, however, accountants can respond to an ATO audit without another professional’s assistance. In terms of coverage, it differs depending on the conditions of the Policy Wording, however, will typically cover companies, partnerships, sole traders, individual taxpayers (like employees), directors, Self Managed Superannuation Funds (SMSFs), Corporate groups, and discretionary trusts.
Make sure to double-check the rules around disclosing financial benefits or remuneration to clients before they take out a policy. In general, accounting practices get a commission for each policy bound by a client. In some cases, this will cover the cost of the premium or a Master Policy. Other offerings like AuditCover do not charge accountants and instead work on an “opt-in” basis where the end-user can quote and bind themselves in several clicks.