Businesses turn to tax insurance to cover themselves from unfavorable rulings

Tax insurance - Business People

Underwriters and brokers are seeing their busiest year ever from companies buying these policies.

Governments worldwide have been cracking down on companies that have been avoiding their taxes, and businesses are now buying tax insurance more than ever before in order to protect themselves against a costly dispute or unfavorable ruling.

This year has proven to be a record-breaking year for the number of policies purchased for this reason.

According to brokers and underwriters, by the close of December, this year will have seen the most tax insurance policies. This makes sense as the number of investigations and the cost of paying for an unfavorable ruling are now higher than ever. That said, even with enforcement being stricter, the policies have become increasingly affordable due to the number of insurers currently offering this type of coverage.

Tax insurance - Person holding paper that says policies

Brokers in a recent Financial Times article said that some companies have been purchasing this coverage to protect them from more than $1 billion in the event that they were to lose a dispute with the IRS.

Tax insurance companies believe that this will be a profitable area of business coverage.

Even with the rise in enforcement, insurers are counting on a good percentage of additional enforcement actions being unsuccessful in their efforts, meaning that payouts will be well within the range of allowing those insurers to be profitable in this area.

“Governments are under intense pressure to close budget gaps and we suspect in some cases they may take more aggressive positions than they have in the past, so a taxpayer is more likely to find themselves being audited,” explained Ryan Transactional Risk head of North American tax insurance Bill Kellogg. “There will be a lot of disputes where we think the taxpayer has a very strong position that we think we can support.”

The Inflation Reduction Act was among the reasons for this increased enforcement trend. It provided the IRS with a notable budget boost for auditing wealthy individuals, large partnerships and corporate taxpayers. Though Republican lawmakers have been seeking to gain back some of those funds, the IRS has started hiring thousands of new staffers to pursue further enforcement.

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