Ernie Neve, CPA
June 12, 2019
Turn on any television, any time of day or night, and you're likely to see an insurance ad, or two, or a dozen. Flo is showing off her "name your price" tool, which sure looks like her company's way of saying "you may not be able to afford all the insurance you need, but we're happy to sell you whatever you can afford." There's the ubiquitous gecko, telling you his company sells insurance for your RV and motorcycle, too. And there's Duncan, age 42, buying an incredible half-million dollars of term life insurance for just $27 per month.
Of course, life insurance, homeowners insurance, and car insurance are just the tip of the insurance iceberg. Why do you think the tallest building in most cities has an insurance company's name up top? Businesses and professionals buy all sorts of commercial coverages for their operations. Celebrities are infamous for oddball policies covering whatever makes them money — so we have Kim Kardashian insuring her backside for $3 million and Keith Richards insuring his hands for $1.6 million. Insurance companies can even buy reinsurance, which is insurance for insurance companies.
Losing a tax audit may not sound as tragic as, say, Keith Richards losing his hands. But the whole concept of "insurance" is about guaranteeing payment in the event of a specified loss. So, if Keith Richards can insure the hands that conjured up "Jumpin' Jack Flash" out of an ordinary six-string, shouldn't we be able to buy insurance to cover unexpected losses to the IRS? It turns out the answer is yes . . . and there's even more than one way to do it.
The most obvious way is to buy something cleverly marketed as "tax insurance." And while you can't just go online to save 15% or more on tax insurance with GEICO, it's really not much tougher than that. High-end brokers sell coverage to reimburse bigger businesses for the cost of taxes, noncriminal penalties, and the cost of taking a case to court. (Typically, these arise out of mergers and acquisitions.) They can even buy extra coverage to "gross up" benefits to cover the new taxes companies owe when they collect on the insurance!
Business owners can use something called an enterprise risk management program to insure risks that they're currently covering out of their own pockets. These typically include operational and strategic risks, like the cost of defending sexual harassment claims, cyber risks, and the loss of key suppliers or vendors. But you might also insure against the cost of defending an IRS audit. The cost of insuring the risk is deductible — and if you have to collect, the cost of defending yourself is deductible, too!
Finally, if you're not sure the IRS will accept your tax treatment of a particular transaction, consider visiting a tax attorney for an opinion letter. Opinion letters aren't "insurance," per se. They can't guarantee you'll avoid actual tax. But in some circumstances, even if you wind up paying tax, the opinion letter can eliminate penalties you might have otherwise paid. In other cases, the attorney can essentially cover your extra costs out of their own malpractice insurance.
Fortunately, most tax savings don't call for any insurance at all. We help clients save taxes with a complete menu of court-tested, IRS-approved strategies. In fact, some of our most powerful strategies actually lower your risk of being audited. So leave the gecko at home, because he wouldn't be any help at an audit anyway, and see if we can save you 15% or more on your income tax!