What Is Tax Audit Insurance, and Does Your Accounting Practice Need It?
A client forwards you a letter from the ATO. It is a review, not an audit, and the client is not in trouble. But over the next six weeks you will pull records, reconcile three years of BAS, draft responses and sit on hold with the ATO. Somebody pays for those hours. Tax audit insurance exists to make sure it is not you, and not an awkward conversation with the client.
This article explains what tax audit insurance actually covers, what it leaves out, and how to work out whether it belongs in your practice.
What tax audit insurance covers
Tax audit insurance covers the professional fees incurred in responding to an audit, review or enquiry from the ATO or a state revenue office. In practical terms that means the accounting fees for preparing the response, gathering and submitting documents, liaising with the revenue office on the client's behalf, and reasonable external specialist costs where they are needed.
The activities that typically trigger a claim include GST and BAS reviews, income tax audits, employer obligation reviews covering PAYG withholding and superannuation guarantee, payroll tax, stamp duty and land tax enquiries, and the data-matching queries that now make up a large share of ATO contact.
What it does not cover
This is the part to be clear about with clients. Tax audit insurance covers professional fees only. It does not cover any additional tax assessed, interest charges, or penalties imposed by the ATO or a state revenue office. If a review finds a shortfall, the shortfall is still the client's to pay. What the policy does is remove the cost of getting to that answer properly.
Why the risk is rising
The ATO's own description of how it works is worth reading. It currently lists 28 active data-matching protocols, drawing on sources that include AUSTRAC transactions, visa and passenger movements, cryptocurrency assets, rental bonds, motor vehicle registries and private health insurance statements. It applies more than 60 identity-matching techniques to tie that data to taxpayers, and where a discrepancy is found the taxpayer is generally given up to 28 days to respond before further action.
Most audits escalate from a review, though the ATO says it may proceed straight to audit where it suspects fraud or evasion or considers an arrangement high risk. Either way, the work of responding lands with the accountant. Data matching means that work is now triggered by an algorithm rather than a suspicion, which is why perfectly compliant clients receive letters.
Two ways to hold the cover
Tax audit insurance can be arranged in two ways, and many practices use both.
• A practice policy that responds when your own practice is reviewed, for example an employer obligations review of your firm.
• Client policies, offered through the practice, that cover the professional fees when a client is reviewed. Practices usually offer this to clients at the start of the financial year or at engagement.
The client policy is where the value usually sits. It turns the audit response from an unbilled favour, or a difficult invoice, into work the practice is paid for.
Will your PI policy respond instead?
Generally not, and this is a common assumption worth checking. Professional indemnity insurance responds to claims against you for alleged errors or negligence in your professional work. Responding to a routine ATO review is not a claim against you. It is ordinary professional work that nobody has budgeted for. The two covers sit side by side and do different jobs.
Does your practice need it?
Four questions will get you most of the way to an answer.
1. How would you bill the hours today? If the honest answer is "we would absorb most of it", the cover pays for itself on the first review.
2. What does your client base look like? Small businesses with cash takings, property investors, SMSF trustees, employers with contractors and anyone with cryptocurrency are all sitting inside active data-matching programs.
3. How often does it happen? Look back over the past two years and count the reviews, enquiries and data-matching letters. Most practices are surprised.
4. How much of it is not really a choice? For some practices, being able to say "you are covered" is part of the client relationship. Once one competitor offers it, it becomes an expectation.
What it is not
Tax audit insurance is not a substitute for good records, sound advice or professional indemnity cover. It does not make a review go away. It means the hours spent handling it properly are paid for, and that the client can be told at the outset that the cost of responding is covered.
Next step
Abacus Australia arranges tax audit insurance for accounting practices and their clients alongside professional indemnity insurance. If you want to add it to your existing cover, or want a quick view of what it would cost for your client base, get a quote and we will come back to you with a clear answer.
