The Australian Taxation Office (ATO) as well as several State and Federal Government agencies are increasingly carrying out random tax audits and investigations. Even if you have not done anything wrong, responding to the tax audit can be time consuming, stressful and costly.
Tax Audit Insurance can come in handy in managing the expenses that your business will incur if audited. It will reimburse you for accountant-related fees, and reduce the hassle.
Since the ATO is continuously implementing improved data matching techniques, discrepancies in tax returns and data received from the various agencies and banks are more easily spotted. The smallest of inquiries can take hours to respond to, and sometimes the process goes on for days or months, which could prove very costly to your business.
Therefore, it is better advised to obtain a Tax Audit Insurance that covers your business for specified costs involved in the audit response.
Costs covered include:
Tax agent fees
Other specified professional fees such as lawyers, bookkeepers, advisers etc.
Expenses incurred during audit (can be between $10,000-$20,000)
Do I really need audit insurance?
In one word, YES. The ATO receives almost 2 million business tax returns and 12 million individual tax returns every year. An average of 350,000 tax returns are identified as containing errors by the ATO systems which red flag the lodgments for potential auditing.
There is going to be an increase in audit activity for all individual, business and SMSF lodged in the coming years. You’re better off protected with an Audit insurance in such circumstances. Audit insurance can cost you as little as $100 per year, depending on the size and needs of your business.
The audit process will require you to at least hire the expertise and services of a qualified accountant to collate the records as per the ATO’s demands. The unpredictable nature of the audit – such that your business can be struck with a tax assessment request at any time – can prove detrimental to your business and its finances. Even if your books are perfect, you need to be protected by audit insurance to avoid negative consequences for your business’s financial situation.
Making it clearer with a case
Here are two examples of the costs related to audit processes:
BAS Review Claim: A retailer with a turnover of around $2 million was asked to provide details of BAS returns for 2 years. The investigation and preparation by the accountant cost the business $3400.
ATO Audit Claim: A large orchard business with a turnover of around $45 million was suspected of under-declaring income over 3 years. A full review of the income received by the business had to be undertaken by an accountant which cost $15,900.
In both these instances, these costs can be covered by an Audit Insurance. The small cost of the insurance can protect you from spending thousands of dollars. For instance, a typical premium of $10,000 worth of cover would start from $200 a year.
Some risks that your business might be prone to that can result in Auditing are mentioned in the infographic below.
Remember, Audit insurance will only cover costs of the investigation or the audit process, but not any fines or taxes that you may receive as a result of the audit.
If you’re a small or medium business owner, it is always good to be cautious, have a reliable accountant managing your books, and getting an Audit Insurance just in case.
Leave a comment below for any questions you want answered or any advice you might need OR book a free consultation with us today to discuss your accounting needs.