When clients receive notice of a tax audit, one of the first questions an accountant should ask is whether the event is eligible for a claim under their tax audit insurance policy. Understanding the boundaries of the policy’s insuring clause is essential for setting client expectations and ensuring a smooth claims process.
Based on AuditCover’s Tax Audit Insurance policy wording, here’s a practical checklist of questions to determine if an audit event is covered:
✅ 1. Is the audit initiated by an Australian government authority?
The policy only responds to audits or investigations conducted by a government authority legally empowered to do so in Australia. If the request comes from a private entity, a software provider, or an industry body without statutory powers, it is not covered.
✅ 2. Is the main purpose of the audit to validate financial compliance obligations?
This is critical. The policy specifically excludes activity-based reviews where the primary purpose is not to assess compliance with financial or tax laws.
Examples of what’s not covered:
- Data-matching exercises without a financial compliance component
- Education campaigns or general risk reviews
- Reviews of industry practices not targeted at the client’s returns
To be eligible, the audit must involve a review of the financial or tax affairs of the insured party for the purpose of validating compliance obligations.
✅ 3. Was the Audit Notice received during the period of insurance?
Because this is a claims-made policy, the timing of the notice matters. A valid claim can only be made if:
- The Audit Notice is received within the policy period, and
- The event giving rise to the audit was not known prior to the policy start date.
✅ 4. Does the communication meet the definition of an Audit Notice?
The policy defines an Audit Notice as a written notification that legally requires a response. If the communication is merely a request, questionnaire, or informal inquiry without legal force, it does not trigger coverage.
Tip: Check if the letter or notice includes a statutory reference, a deadline, or legal consequences for non-compliance. If not, it may not meet the definition of an Audit Notice.
✅ 5. Are the professional fees incurred necessary and reasonable?
The policy covers the reasonable costs of accountants and tax professionals in preparing responses and managing the audit. However, fees must be:
- Directly related to the audit event
- Reasonable in scope and duration
- Not otherwise recoverable from the client or a third party
✅ 6. Are there any exclusions that apply?
Common exclusions include:
- Audits arising from fraudulent acts
- Pre-existing matters known before policy inception
- Fees related to tax planning, financial advice, or lodgment services
- Any penalties, fines, or interest charged by the ATO or another authority
✅ 7. Has the claim been reported promptly and in accordance with policy conditions?
Timely reporting and cooperation are part of the conditions precedent to cover. Delayed notification or non-disclosure of relevant information may jeopardize a claim.
Final Thoughts
Understanding these nuances helps ensure only eligible events are submitted for claims — saving time, maintaining client trust, and upholding compliance with the insurer’s obligations. When in doubt, refer back to the policy wording or contact your tax audit insurance provider to clarify whether an audit falls within scope.