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Is tax audit defense worth it?
Get professional guidance to prove your business tax returns are legit.
Audit defense may help with your business’s documentation during a tax return audit. It may even reduce certain penalties if your business meets the legal requirements. However, you’ll still pay penalties if you can’t support the reason for taking a business expense or deduction.
What is tax audit defense?
Audit defense is a type of insurance that covers you if your business receives an IRS audit. It can cover the costs of planning for the audit, preparing any necessary IRS documents and fees for the professional representing you.
Tax audit coverage typically covers the costs involved with preparing for an audit and satisfying IRS requirements. Those costs include:
- Tax professional responding to IRS messages
- Developing a plan to respond to the IRS audit
- Negotiating with the IRS when applicable
- Preparing collection documents if you need to pay additional taxes
How does TurboTax audit defense work?
TurboTax provides audit defense to customers through TaxAudit during your membership period. TurboTax will provide a professional to respond to the IRS, develop a strategy and prepare tax documents if you get audited.
However, you must use receive the notification of an audit during the membership period and notify TaxAudit within 15 days. The membership period starts when TurboTax receives your payment and typically ends within one year. Your protection for the previous year’s taxes extends an extra year if you re-enroll for audit protection.
Should I buy coverage for potential tax audits?
Buying insurance for tax audits can help if you feel your business submitted a confusing tax return with multiple forms. You might also buy coverage if you want extra peace of mind about an IRS audit.
However, tax defense doesn’t prevent an audit or tax penalties. It simply provides a professional who can help you decipher the paperwork and minimize penalties in some cases. Also, consider that tax preparers hold responsibility for costs and penalties if their services led to your tax return errors.
What types of tax risks does my business face?
Typical risks a business could face include:
- Inconsistent records. If your business’s revenue, expenses and employee records don’t reconcile, this may flag an IRS audit especially with high-dollar inconsistencies.
- Non-compliant contractor payments. Dealing with contractors’ entitlements and records incorrectly can attract attention if your business and the contractor’s records don’t match.
- Outstanding tax payments. Late payments could signal that your business systems may require closer examination and further auditing.
How much does tax audit defense cost?
The cost of audit protection ranges widely based on your business’s size, the type of tax return complexity and the defense service you use. TurboTax audit defense costs around $45 per year for individuals and small businesses.
But with professional law or tax services for businesses, you could pay anywhere from $1,500 to $7,500 for standard audits. Also, costs could range from $5,000 to $15,000 for representing an appeal or tax court case. However, a few firms or software companies include this service free of charge when you use them to prepare your taxes.
What’s excluded from coverage?
Tax audit insurance may not cover several items:
- Any fines your business may receive as a result of an audit
- Audits your business gets notified of before you buy coverage
- Audits for unfiled tax returns
- Audits notified about after your end date for audit defense coverage
- Criminal investigations
- Representation for those using the audit to protest taxes
- Requests for defense filed after the company’s due date, such as after 30 days of getting notified about the audit
How to prepare your business for a tax audit
Your business’s audit can go smoothly with a little preparation, whether the audit involves all your records or questioning a specific item. You can prepare in a few steps:
- Review your tax return. Go through your entire tax return, noting your expenses, deductions, income and the situation in question. That way you can ask your tax preparer questions about the numbers or documentation ahead of time.
- Consult a tax professional. For an extra eye, consider getting a tax professional’s help throughout the audit. Or you might consult your tax preparer or advisor if you run across a question with your tax return.
- Review tax laws relevant to your business. Brush up on tax laws required for your type of business, especially deductions or expenses you filed on your return.
- Bring proof of records. If you’re meeting with the IRS official, match up all receipts and documentation to your expenses and deductions. Then, organize them and bring those records to the meeting.
- Own your mistakes. If the IRS finds a mistake you overlooked, pay for that tax and any penalties promptly. Consult your tax professional if you have questions about reducing or avoiding the penalty.
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Audit protection can help you navigate the waters of business tax laws when an auditor requires extra proof for your returns. While you might enjoy the extra peace of mind, consider that your tax preparer already has a legal obligation if they make a mistake on your return.
While you’re weighing whether your business could use this coverage, make sure your business is protected for other types of risks it faces every day.
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