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No business owner likes the thought of being audited. However, the fact is the tax department could come knocking at any stage, to check if your reported revenue and tax claims match up with your business activities.
Because an audit is usually unexpected, it’s unlikely you would set aside time or funds in your start-of-year planning for such a process. This is why it makes sense to have a tax audit insurance policy.
Take a look at some quick information about tax audits and the associated insurance:
Who is at risk of a tax audit?
According to the Australian Tax Office, audit programs in Australia range from relatively quick examinations of source documents to more intensive analysis of arrangements and transactions.
For reference, in 2017–18 the ATO Deputy Commissioner Deborah Jenkins reported that the ATO undertook about 120,000 audits of small businesses. These audits related to things like:
- omitted income
- PAYGW discrepancy events
- incorrect and incomplete obligation reporting (including GST obligations)
- non-lodgement
- employer obligations
- mistakes as a result of business structures
Audits can be triggered because the ATO is cracking down on the industry your business is in. You may find yourself being audited because your businesses reported income is low in comparison to other providers that offer the same goods or services.
Late or overdue tax returns can place you at risk of hearing from the tax office. In some circumstances, it’s possible someone may have made a complaint or ‘dobbed’ your business in, which will lead to an investigation.
The tax office has also openly explained that it audits small business owners who report minimal profit but seem to have a lifestyle that exceeds the income they declare.
If your tax reporting is up to date and you have evidence of all the claims you make (receipts, invoices, records etc), you should be able to make your way through an audit with less stress. However, even if your audit goes smoothly and you have an excellent accountant who has everything to hand, it will chew through time and money.
How to minimise the financial impact of an audit
It is possible to include specific tax audit coverage in your insurance portfolio.
If your business does find itself selected for auditing, insurance will cover:
- The cost of your accountant and/or tax agent
- Other professional fees that may arise (e.g. legal fees)
Consider how much extra time your accountant may need to provide highly detailed evidence of your business earnings and activities, and to cross-check everything that has been submitted to the ATO in recent years. If you can have insurance in place to take care of the costs, you’ll be able to sleep that little bit easier at night.
Generally speaking, tax audit insurance will not cover any fines or taxes you have to pay as a result of the audit (yet another reason to ensure you work with an excellent, experienced accountant). It also won’t cover your own time or salary if you find yourself spending hours tracking receipts and financial records, nor will it cover your employees’ time or wages.
There is likely to be a cap on the amount of money your tax audit insurance covers. It may be up to $50,000, depending on the specifics of your business.
Protect your business from the unexpected
Audits can come out of the blue, even if your business is doing everything right. For this reason, it makes sense to have tax audit insurance in place.
Your insurance doesn’t have to cost a great deal in premiums, but it can save you from the discomfort of an accounting bill that you didn’t factor into your budget.
Want help to choose the most cost-effective tax audit insurance for your business? Contact Crest Accountants today.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
