What is Audit Insurance and How Important Is It?

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Fraser Scott are thrilled to partner with AuditCover and offer our clients coverage for the professional fees related to any government agency audit event.

In what has been a very unique and challenging year for most, 2020 has seen record numbers of Australians receive some form of government support of stimulus. JobKeeper, JobSeeker, Cashflow Boost, early Superannuation are a few of the more obvious ones. With an income tax gap hovering around $10 billion, the Australian Tax Office (ATO) are looking to close this divide and recover these funds over the next few years. How will they do that? By using sophisticated data-matching technology to carry out more audits.

Unfortunately, even businesses with nothing to hide or that operate in ‘low risk’ industries are not immune from the potential costs of an audit. More than ever before, these agencies are conducting these audits randomly, relying on machine learning to do so. As you may expect, getting around to responding to these investigations can be expensive when you consider the time invested by your accountant.

Audit insurance policies are extremely useful in managing the financial expenses you would incur in responding to the audit. With ever-improving technology, the ATO relies much less on its people power than its computing capacity to shine a light on any data-related discrepancies across government agencies. Sometimes the most prudent and careful business owners get audited. When this occurs, these agencies may require provision of a detailed disclosure of their business’ finances, which can take weeks or months to resolve.

With time being your most valuable commodity, an Audit Insurance policy may offer some peace of mind in managing these unforeseeable expenses. Costs covered may include any professional fees related to responding to the audit, including:

  • Accountants
  • Tax agents
  • Lawyers
  • Bookkeepers
  • Advisers

Is this necessary?

In short, there is clear value for SMEs in Australia. Audit Insurance is now more of an essential risk-management component of being a tax-payer. With upwards of two million business tax returns and 12 million individual returns, more than 400,000 were flagged for a potential audit last year.

We can expect this number to grow over the coming years for all SMSFs, businesses and individuals. With that in mind, the relatively low expense of Audit insurance makes this kind of protection much more appealing. By adding all related entities to the one policy, you can rest easy with broad coverage and a healthy limit of cover for any costs incurred in addressing audit obligations from the ATO, State Revenue Office, Work Cover, or any other government agency that conducts audits in Australia.

Some business owners limit the risk of an audit with perfectly managed finances and bookkeeping. It is worth noting that most audits result in no penalties, and mostly it is innocent discrepancies that trigger an audit. Given that the time needed to respond to such an audit may distract from the focus of growing the business, the risk of not having coverage may outweigh the benefit of tidy bookkeeping as an alternate risk-management strategy.

The bottom line is that protection with audit insurance safeguards against the time-consuming nature and unpredictability of being audited. The relatively low cost of audit insurance can end up saving tax-payers thousands in professional fees. While audit insurance covers you for the costs of the investigation and your accountant’s fees, it will not protect you against any fines or taxes you may incur as a result of an audit.

The obvious first step in being prepared for an audit is having a reliable accountant managing your books. The logical next step is having Audit insurance ready to go.

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