Law360, Inflation Reduction Act Could Boost Tax Insurance Popularity:
Concerns that the Inflation Reduction Act's funding boost to the Internal Revenue Service could lead to more audits may spur new interest in tax insurance, an increasingly popular product for mitigating the risk of challenges by taxing authorities.
President Joe Biden signed H.R 5376, or the Inflation Reduction Act, on Aug. 16. Under the law, the IRS will receive a nearly $80 billion funding boost, with nearly $46 billion earmarked for enforcement. As a result, the IRS will not only have the budget to increase the number of audits it performs but also be able to litigate more of the tax positions it reviews, Jessica Harger, North America tax practice leader at Aon, told Law360. Even without the act, the number of IRS audits has been increasing in recent years after hitting a historic low in the last decade, Harger said.
The increased probability of an audit by a taxing authority could result in more taxpayers seeking out tax liability insurance, an insurance product that has been steadily rising in popularity in recent years. Six thousand such policies were placed in 2021, compared to 500 policies placed in 2015, said Dean Andrews, head of tax liability insurance at broker BMS Group.
The product covers a policyholder against the risk of its tax position being successfully challenged by a taxing authority. Tax insurance policies will normally cover the additional tax owed as a result of a successful challenge as well as interest and penalties. They can also cover legal and accounting fees incurred in defending a challenge as well as pay a "gross up," which is a payment made to cover any tax due on the insurance proceeds paid to the policyholder.
"Five years ago, there were maybe four or five insurers that would do tax insurance. … Today, just in the U.S. market — this isn't even globally — we've probably got about 20 insurers now that do tax insurance," Mark McTigue, managing director at Marsh LLC, told Law360.
Such policies, which usually have policy terms between seven and 10 years, are only written on tax positions that are strong and supportable and are not meant to cover instances of known wrongdoing, experts told Law360. At the same time, tax laws' complexity means there will be instances in which tax positions based on reasonable interpretations of tax laws and regulations may be challenged by tax authorities. In such cases, tax insurance can provide policyholders added security in their tax planning, Harger told Law360.
