What is tax Audit Insurance? And Why Should You Consider It?

Everyone loves doing their taxes right!  Nobody does, but it is a reality of life.

But there is one thing worse than tax and that is a Tax Audit.

The Australian Taxation Office (ATO) focuses on different areas each year, and more recently they have been looking at various issues relating to small businesses.  Don’t think that ATO audits are just the domain of the big guys, because it is most definitely not.

A tax audit can be slow, very painful, and an expensive experience to go through.  This is why it might be worth considering Tax Audit Insurance.

What is a tax audit? 

The ATO has the power to audit any individual or business to verify the financial information being provided is real, true, and correct.

An audit is an examination of the taxpayer’s books and records to determine whether taxes are being correctly reported. An audit can range from a quick examination of source documents to a more intensive analysis of complex arrangements and transactions.

What triggers a tax audit? 

But what triggers them? And what can you do to avoid being audited? Here are a few common reasons:

There are several red flags that can trigger an ATO audit. These may include home office expenses, work-related travel expenses and private health insurance claims. However, each year the focus often changes so get more detail direct from the ATO website. For example, in 2023, the ATO’s agenda items highlight the three hotspots subject to increased scrutiny: rental property deductions, work-related expenses, and capital gains tax (CGT).

Here are examples of what might trigger an audit:

• Not declaring all your income – Even though the ATO has a copy of your Group Certificate, it’s still your responsibility to make sure you’ve declared everything you’ve earned. 
• Inconsistencies – this could include unusual deductions, excessive spending on deductions, sharp drops or wild variations in income from year to year.
• International transactions – even in today’s world of global business and banking, money regularly going in and out of foreign bank accounts will make the ATO stop and take a closer look.
• Lifestyle mismatch – this is when your income and lifestyle don’t match – you tell the ATO you’re only earning $60,000 a year, yet you drive a $150,000 car and go on international holidays 3-4 times a year.
• Illegal deductions – claiming deductions for which you’re not entitled is a red flag.
• Super discrepancies – they look into the amount of superannuation to your employees and review if it’s correct.
• Your BAS, GST, and tax returns don’t add up – make sure everything balances.
• Your business is always running at a loss – even if there are good reasons why, if you’re still running at a loss three out of any five years, this can cause the ATO to take a closer look.

What happens if you get audited? 

Start by contacting your accountant. An audit by the ATO is when you need your accountant to work closely with you. Tax audits can be time-consuming and expensive and that’s why we suggest you investigate tax audit insurance as a business must-have.

What is tax audit insurance? 

Tax audit insurance is an insurance policy designed to help cover the costs your business incurs when it’s being audited by the ATO.

Regardless of how small or large an audit is, it will be time-consuming and the preparation of documents taking days, weeks or sometimes months, especially if it covers multiple reporting periods or tax years.

What it will typically include:

• accountant’s fees
• fees for other professionals such as bookkeepers, financial advisers, lawyers or solicitors
• expenses incurred during the audit – these costs may run into the tens of thousands of dollars.
• tax agent fees

What it typically won’t cover: 

• fines or taxes imposed upon you or your business
• your employee’s time or wages
• your time or wages
• lost jobs, or opportunities missed due to the tax audit
• returns that haven’t been prepared or reviewed by a tax agent prior to lodgement.

The cost of your tax audit insurance will largely depend on the amount of coverage you require.

If you want to consider Tax Audit Insurance, talk to your local Rivers Insurance Account Executive.