If you did a study on the people paying taxes as individuals or against business incomes, a majority of them would want to be honest tax payers. They would submit their income returns disclosing all that they have earned and pay the taxes due as per law. But in spite of this, the tax administrators do pick a few accounts for investigation. There is no wrong intention on the part of the revenue authorities in ordering an investigation. They are doing their job. And the processes have also been made more transparent now with the computers picking the persons or companies to be investigated. So you will never know if and when your name could get picked. The safest way is to take an insurance against tax investigation and stop worrying about it.
But why take the Insurance
The truth is that when the taxman comes knocking and asks for the whole set of papers for a whole year and asks you to link them up with the statement you have filed with them, you will hardly be able to handle it yourself. You will have to hire an accountant to do the work and accountants don’t come cheap. You would have a job to keep or a business to handle. You wouldn’t want to spend days with the investigator digging into documents you may not even remember where you kept. Even otherwise you would have engaged a professional accountant to do the tax statement in the first place. But when you call an accountant to help out with the tax investigation, you need to pay the professional fee and charges. This could amount to a huge sum. Imagine this, by going in for an insurance against tax investigation, you would end up paying a premium of say $250 whereas the accountant’s fee could even be as high as $4000! These are not exact figures, but do give an idea.
The Expenses could be Even Higher
The issue with getting stuck with a tax investigation is that it might turn out to be more irksome than you thought. If at the first level of investigation, the documents you presented, your books of accounts and other testimonials establish that you have correctly computed your tax liability and paid it up, then the matter ends there, and your insurance will cover the accountant’s fees, and it is done and dusted. However, in cases where the investigator does not agree and imposes a fine or demands a higher amount in tax, you will require a tax attorney to fight it out and get a court order to clear your case that you had indeed not erred in your tax statement.
Again, the fee charged by the attorney can be covered under the insurance against tax investigation leaving you with no bill to pay whatsoever.
But before you get your insurance cover, do make a study of the policies on offer and evaluate the good and bad of the competitive quotes you receive. There will always be fine print in any such insurance cover. Understand all of them and then issue the premium check.