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Audit Insurance: Protecting Businesses & Sophisticated Individuals

In today’s ever-changing and complex compliance landscape, the Australian Taxation Office (ATO) has also become more vigilant over time and enhanced their data-matching capabilities to increase their scrutiny of financial records – meaning individuals & businesses of all sizes and shapes face a higher risk of being audited. To safeguard against the potential financial burden of a tax audit, it is possible to take out an audit insurance policy. Here, we’ll look at what audit insurance is, who uses it, and the potential consequences of not having a policy in place.

What is Audit Insurance?

Audit insurance, also known as tax audit insurance or tax investigation insurance, is a specialised form of insurance that provides coverage for the expenses associated with a tax audit or investigation. When a business purchases a policy, it is protected against the costs of professional representation during the audit process, which can include hiring accountants or tax experts, or solicitors to represent you in defending tax positions subject to ATO reviews or audits.

Who Uses Audit Insurance?

There are a few key reasons why business owners might consider such a policy, and they are as follows:

1. Rising Audit Frequencies: In recent years, the ATO has increased their efforts to detect tax compliance issues, with individuals and business entities alike. As a result, the frequency of audits has increased, and businesses & sophisticated individuals face an elevated risk of being targeted. As data matching capabilities improve, fewer businesses will be able to escape the ATO’s audit reach, even if they are, broadly speaking, doing the right thing.
2. Mitigating Financial Risks: A tax audit can be an expensive and time-consuming process, especially for small and medium businesses that may not have the resources to cope with the associated financial strain. Audit insurance offers taxpayers the peace of mind that if they are to be audited, the relevant accounting and tax specialist fees will be covered, and their bottom line won’t be adversely impacted by incurring those additional costs (which can be significant depending on the scope of the audit).
3. Complex Tax Legislation: Tax legislation is tricky to navigate, and subject to relatively frequent changes. Even genuine errors whereby you inadvertently omitted income in the past, can lead to the ATO conducting an audit in the years that follow. With audit insurance, you can rely on the expertise of tax professionals to guide you through the process without the potentially significant financial consequences.

The tax system has a reverse onus, effectively requiring you to substantiate a position, otherwise it will be denied. Often, the retention and quality of records is a driving factor, as is receiving proactive and upfront tax advice on any one-off, unique, and complex transactions that you may have undertaken. Where there has been an inadvertent omission in the past, there is the opportunity to reduce penalties and make good on any tax shortfalls via a voluntary disclosure. Even adopting a best practice approach to tax compliance doesn’t prevent the ATO from undertaking an audit to verify the merits of your tax returns. That’s why Audit Insurance can be so important.

How Does Audit Insurance Assist?

Whilst audit insurance won’t cover any primary tax shortfall, penalties, and interest, it will cover the cost of the audit management process. Even if the ATO audit ultimately concludes that the tax position disclosed was correct, the process can often be costly without such protection. It is not necessarily appropriate for everyone, but where increased audit risks exist such as significant, complex, or, international transactions, then it is worthwhile considering whether audit insurance is appropriate.

What Now?

At McKinley Plowman, we have represented several clients through the ATO review process and ultimately resulted in successful audit insurances claims. If you would like to know more about how we can help you assess the appropriateness of an audit insurance policy, and how that fits into an overall insurance & risk management strategy, please contact McKinley Plowman today on 08 9301 2200 (Joondalup), 08 9325 2411 (Perth), or visit our website.

Further Reading: ATO Risk Review & Audit Processes

written by:

Steven Lisle

Tax Manager Steven Lisle has been part of the McKinley Plowman team since 2007, and in that time has built his repertoire upon delivering industry leading, up-to-date international and Australian tax strategies and consulting services. Steve's clients enjoy the optimised tax outcomes he provides them, especially where complex structures could otherwise lead to significant tax obligations.