Many accounting firms offer an audit insurance policy as an optional extra for their clients. It is just about time for Jigsaw Tax’s policy to renew and we will no doubt get many questions from our clients about the need for this policy. Given that we have been through a year with many self-assessed benefits being provided (particularly Jobkeeper), we are strongly recommending to our clients that they consider taking out a policy. Here is a simple explanation about what audit insurance provides.
What does audit insurance cover?
First, you need to understand what the insurance covers. The insurance is not in place to prevent you from being audited, it is in place to cover the costs of your accountant helping you through the audit process. It does not cover the result of the audit either. If the auditor finds a shortfall in the tax/superannuation/workers compensation you have paid requiring you to pay the shortfall, possibly with penalties and interest, you will still need to pay that. Effectively it covers the cost of your accountant’s time, and other professionals they may ask to assist in your audit case.
Do not expect your accountant to act for free if you are audited. This is additional time that your accountant will need to spend on your behalf and they will charge you for it. If you have audit insurance it is likely this time will be covered by the policy. If you don’t have audit insurance you should expect to pay for this service.
Audit insurance typically covers audits that arise from the ATO and other government agencies. It covers audits for wage obligations, payroll tax and workers compensation. Make sure you read your policy to understand what is, and what is not covered by the policy.
What if I don’t take out the policy?
The policy is completely optional, and like any insurance you run the risk that if you are not insured you will need to pay for the costs yourself. We take out car insurance even though we hope we will not have a car accident. Similarly, you can take out audit insurance in the hope that you will not need to draw on it. If you do get audited, it is nice to know it is there.
If you don’t have audit insurance you can either handle any audit yourself, or you will need to pay for the services of a professional to help you. Most audits take a number of hours (probably 3-4 at a minimum) so the cost is certain to exceed the insurance policy cost.
What are the benefits of having a professional help you with an audit?
From personal experience you will get a better result if you have a professional help you with the audit. Your accountant understands what the auditor is looking for and can help to negotiate lower penalties. They also know how to speak in the language of the auditor, and what not to say. I have seen clients mention things to auditors that get them into more trouble. We know what evidence is needed to argue for the view that was taken and we know when to concede that something was wrong and ask for leniency on your behalf.
Another major benefit is that it saves time and stress. If someone else can pull the information together that saves you valuable hours which can be better spent running your business.
Do I need to be worried?
The Government have committed to over $500 billion in 2020 providing stimulus support to all areas of our economy. This is money that Australia does not have and it will take years to recoup through an efficient tax system and increased wealth (Gross Domestic Product) in the Australian economy.
The ATO released statistics on the Tax Gap (if you want to find out more about the Tax Gap read my article https://www.tradiewags.com.au/wagtips/2020/11/1/what-is-the-tax-gap) indicating that in 2017-18 over a third of the tax gap came from small business. This equates to $11.1 billion. It is clear that with better use of information the Government will be targeting small business so they can close this tax gap. Take this as a gentle warning – audit is going to be a big issue over the next few years.
We are concerned that people have applied for Jobkeeper without going through the myriad of tests that were required. We know that businesses are struggling and sometimes that means bending the rules a little or missing compliance obligations. We understand that compliance it difficult and that it is easy to make mistakes or forget to lodge something. We are also seeing an increase of businesses being reported to the ATO for not doing the right thing, which typically results in an audit.
Insurance is a method of risk mitigation. You cannot ‘insure’ that you will not be audited, but you can insure so that your audit will be handled in a professional way without cost constraints. At Jigsaw Tax we will be recommending that our small business clients, particularly those who received Jobkeeper, take out audit insurance this year.
Jigsaw Tax & Advisory have staff who specialise in managing ATO audits. This team is managed by ex-ATO auditors who understand how to communicate with the ATO in an effective way. We do this not only for our own clients but also on behalf of other firms. If you are interested in this service, please get in contact with Jigsaw Tax & Advisory and we can discuss your needs.