Q - Audit Insurance? Worthwhile or Rip-off?

Just received letters from accountant offering us the Audit Insurance (or Audit Protection Service) for between $200 to $300 annual premium - covering maximum $10K of accountant fees in attending an ATO audit, review or investigation.

I have searched old threads in Somersoft forum and noted that a few years ago, both Mry and DaleGG viewed such an insurance as a rip-off.

http://www.somersoft.com/forums/showthread.php?t=35715&highlight=audit+insurance

http://www.somersoft.com/forums/showthread.php?t=27032&highlight=audit+insurance

http://www.somersoft.com/forums/showthread.php?t=18111&highlight=audit+insurance

I must say that I am a bit skeptical about such an insurance policy also. In an event of an ATO audit, we have to produce all the records - not the accountant. Why should we pay for their time in attending the audit? Isn't it at the end of the day we are responsible for all the claims - the accountant only put them together? And, if there is anything dodgy we are the ones who bear the consequences and not the accountant.

We would appreciate your views on this, please? Thanks!
 
I would have thought that your Tax Agent would cover your ATO audit gratis, provided you gave them full and frank disclosure when they lodged your return.

That might not apply to the $80 per return bucket service.

Cheers,

Rob
 
RobG

Why should this be provided gratis ? As you know the work involved in audits can be quite time consuming particularly for large corporate groups. We recently had a client where we expended about $6K in time in relation to a complex payroll tax audit involving a number of interrelated entities. the client had audit insurance and the insurance company paid for it.

Not quite sure why the time would be free of charge ?

Can I assume that if the ATO performed 30 audits of your clients on payroll tax, GST, income tax, CGT or any other matter you worked on then you would provide this free of charge ?
 
Hi,

We have offered all our clients Audit Insurance because the amount of audit activity has increased 10-15 fold over the last 3-4 years. The Data Matching facilities of the ATO, SRO's, Workcover Authorities and other Government departments is getting more sophisticated and we are finding more and more of our time dealing with these authorities queries and not being able to recover our time on this work because we will do some of it pro bono or just write time off. Any invoices we send to clients on this matter are met with resistance.

The vast majority of these inquiries are spat out from an Authority's computer but we still have to follow through and they rarely result in any negative financial adjustment to the client. It is the government that is forcing us into this offering to our clients.

If our client does not want to take this up and the ATO ask information on their GST refund then we can at least send them a bill for gathering the information and filling in all the forms and they will understand that we have offered them this protection.

The Insurance Company passes on a small portion of the annual client premium payment to our firm and this covers off on our administrative costs and the Reconciliation which drives us mad and takes a lot of time.

We are happy that all our clients know we are getting a lot of investigative work completed as virtual contractors of the Government and that we want to be paid by someone for doing this insufferable work.

It should be seen as yet another Government tax.
 
Rob .
Sounds fine that accountants should offer this service gratis. Of course you would not expect them to deprive their children of food or quality time with their parents so it would seem loigical that such a cost should be factored into their billing. Let's see, what would be a fair amount? Probably the stated audit insurance premium. Would you advocate compulsory insurance by default?
 
In the context of the scenario many SS forumites seem to be in ...

Mum & Dad (unsophisticated employees) approach an Accountant to structure their investments.

Accountant stresses need to hold IPs in a trust structure with corporate trustee that they do not understand and do not know how to administer.

Accountant arranges trust deed, then does all the tax returns for Trustee & beneficiaries, prepares distribution statements etc.

All Mum & Dad have to do is provide receipts & details, Accountant classifies all expenses and income for financial statements and tax returns.

Accountant is already familiar with trust deed, company constitution and charges $300 per hour whilst paying bookkeeper $20 per hour to perform the routine tasks.

In that scenario, the Accountant is merely auditing their own work. So provided the client has been diligent in their provision of source information, it appears more of a formality.

Cheers,

Rob
 
Its a rort, like most almost unnecessary insurances. Most accountants use it as just another profit centre in their business.

Why cant you represent yourself at an audit? The chances of being audited are very low anyway.
 
Well, I have learned something new!

I did not know there was such a thing.

Time to do some research.;)

Regards Jo
 
In the context of the scenario many SS forumites seem to be in ...

Mum & Dad (unsophisticated employees) approach an Accountant to structure their investments.

Accountant stresses need to hold IPs in a trust structure with corporate trustee that they do not understand and do not know how to administer.

Accountant arranges trust deed, then does all the tax returns for Trustee & beneficiaries, prepares distribution statements etc.

All Mum & Dad have to do is provide receipts & details, Accountant classifies all expenses and income for financial statements and tax returns.

Accountant is already familiar with trust deed, company constitution and charges $300 per hour whilst paying bookkeeper $20 per hour to perform the routine tasks.

In that scenario, the Accountant is merely auditing their own work. So provided the client has been diligent in their provision of source information, it appears more of a formality.

Cheers,

Rob

You don't want them doing that for free though do you Rob ;)

Just a thought as per Babushkas post...If covered to $10,000 do you reckon they will take their time?

To the accountants

What are the idemnity limits on these types of insurances?

What is included and excluded..what to watch out for in these type of insurances?

How about habitual late lodgers of tax returns (does this one raise your chances for an audit also)?

Whats an audit usually cost Vs the expense of the insurance?

As per below, would the ATO first issue a "please explain" letter to the accountant before going down the full-audit route?

ATO Audits 10,000 over Trusts
 
Rob .
Sounds fine that accountants should offer this service gratis. Of course you would not expect them to deprive their children of food or quality time with their parents so it would seem loigical that such a cost should be factored into their billing. Let's see, what would be a fair amount? Probably the stated audit insurance premium. Would you advocate compulsory insurance by default?

Would that lesssen the premium across the client base?

How about if the accountancy firm takes it on for their practice and passes the cost across the board to all clients; would that be cheaper for the clients?
 
Hi, in this, I agree with evand. I was quite annoyed that they kept sending me the 'offer' with pushy demands that I respond to it. I'd ignored the 1st 2.

I decided that if ever I were to be audited, I'd take my entire lot of files to the ATO & go through them personally with them.

So I'm in the process of making sure all my papers are filed correctly.

KY
 
Redwing

Depends on the audit coverage provider as to what is covered. The one we use seems to be quite comprehensive and includes general queries from the ATO regarding GST, payroll tax, income tax, etc.

The commissions that accountants earn from audit insurance, as Pat says, just covers the cost of administering the process. I certainly don't see it as an extension to our business model nor as an extra way of making profits for the business.

Most of our client base consists of businesses earning between $5M to $100M per annum held through a plethora of entities and the associated individuals and their families.

We provide the option of audit insurance so that if they are audited then the work done to answer the queries from the ATO (and they can be substantial, particularly if a client has 16 interrelated entities in different states and throw in an CFC or FIF for good measure). The accounting fees are then covered.

Agree that if the return is small and the investor is small (in my view net assets less than $5m) then audit insurance is not really worth it. Once you have large corporate groups, interrelated entities and offshore dealings then the chance of an audit increases and the costs involved. Internal accountants in businesses turning over $20M plus do not have time to be involved in some of the ATO audit queries and so for efficiency purposes they outsource this to their external provider. In those cases the audit coverage will ensure that they do not wear the total cost of this outsourcing.

It is always a cost/benefit analysis. If you don't want the insurance then you simply say no I will handle the process myself if I am audited. For smaller investors this works well.
 
Agree that if the return is small and the investor is small (in my view net assets less than $5m) then audit insurance is not really worth it.

It is always a cost/benefit analysis. If you don't want the insurance then you simply say no I will handle the process myself if I am audited. For smaller investors this works well.

Hi Coastymike

Thanks for your further views in that audit insurance may not be necessary for small investors (which I consider myself to be one).

If I understand correctly from your explanation that, in an event of an ATO (and having no audit insurance) I should be able to say to my accountant that I will handle the process directly with the ATO. And, my accountant should not charge me anything - other than to advise me of the audit on my tax returns.
 
Just a general thanks to all the forumites who have contributed your views through your answers on my question regarding audit insurance. Appreciated the different viewpoints and explanations - which help me in affirming my own view!
 
Hi Coastymike

Thanks for your further views in that audit insurance may not be necessary for small investors (which I consider myself to be one).

If I understand correctly from your explanation that, in an event of an ATO (and having no audit insurance) I should be able to say to my accountant that I will handle the process directly with the ATO. And, my accountant should not charge me anything - other than to advise me of the audit on my tax returns.


Exactly Babushka, if you don't want to pay it don't take it up and if you are asked by any authority to help them with information then you can do it yourself.

It's great living in a democracy you get to choose.
 
I received a letter offering audit insurance recently too, and am considering which way to move on it. I'm aware of the negative view that DaleGG held about this insurance.

If I don't want to take up the offer I'm supposed to sign a decline statement, part of which reads ".. [accountancy firm] will not be liable for any costs that may occur in the event of an Audit by the ATO or Government bodies".

This seems too broad; some costs may actually stem from accountant's blunders for which responsibility should be taken. Is this kind of blanket exclusion declaration usual? warranted?



@babushka:

Do you think those controlling HDTs are more likely to be audit targets?

Does controlling a HDT these days mean one can't afford not to have audit insurance?

Appreciate your thoughts.
 
First of all let me say I've got nothing against insurance, I pay many $$$'s every year in all sorts of premiums and regularly encourage people to get proper insurance, including here on SS.

However this one doesn't seem like it would be needed by most small time investors (not talking about corporate or more complex cases here). Something like LL or building insurance you want because an incident could happen just about any time, every year, ad nausea.

In this case - how often are you likely to get audited? For a start a lot of people will never get audited, then some will be unlucky and will be - but how many times? (again baring in mind we're talking about 'ordinary' investors, not the Pratt's or Packers)

So for a $400 premium per year for what - until you die since an investor will have eternal income? That's a lot of cash, and even if you were audited every 10yrs (unlikely I'd say) - that would still leave you with $4k to pay your accountant to show up to a required meeting with the relevant documents.

Now if the likelihood of audits started increasing dramatically it may be a different story, but with the slim chance of it happening now and even then to have it happen repeatedly - just doesn't seem like a worthwhile premium to me. It's not the cost, $400pa plus the tax deduction would be sfa, but I just don't see the need (and this is coming from someone who probably already has more insurance than he needs :eek:).
 
@babushka:

Do you think those controlling HDTs are more likely to be audit targets?

Does controlling a HDT these days mean one can't afford not to have audit insurance?

Appreciate your thoughts.
Theo: I can't answer your question about HDTs and the likelihood of them being targeted by ATO for audit.

I am a small investor and always try to keep it simple. And, one thing DaleGG said in his books which stays with me is to get into the habit of good record keeping (even though it is very boring and time consuming). This has many benefits, and one is in the event of an ATO audit, that we can readily provide the documentation in support of any claim.
 
Have just been talking to my fiancée about this audit insurance topic. For those considering it, check your home policy PDS first - chances are (if you're with a good co.) you're already covered for this up to a certain amount, in this policies case $5k.

A lot of people don't realise home policies cover a lot of extras. Some examples:
- Mortgage discharge cost.
- Legal defence costs brought about by someone suing you.
- Vetinary costs.
- and lots more obscure stuff you'd never think of.

Just another reason why I stress to people to look at the quality of the cover you're taking out, not just the price.
 
Thanks babushka, and also steveadl.. that's an interesting idea about audit cover through home policy. I'll check that out.
 
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