Estimated reading time: 9 minutes
TL;DR
The ATO conducts over 500,000 reviews and audits annually. Small businesses are 3x more likely to be selected than large companies. A typical audit costs over $8,500 in accountant and legal fees. Tax Audit Insurance covers those fees, not the tax, just the professional cost of responding. You can’t buy it after the ATO contacts you, so the time to act is before they do.
What is Tax Audit Insurance, and do you need it?
Tax Audit Insurance covers the professional fees, accountant and legal costs, you incur when the ATO selects your business for a review, audit, or investigation. It does not cover any additional tax the ATO may assess. It covers the cost of defending your position.
An ATO audit is expensive even when your returns are completely accurate. Your accountant spends weeks gathering records, preparing responses, and attending meetings. Those hours are billed to you. Tax Audit Insurance means that bill doesn’t arrive unannounced.
Key facts
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The ATO conducts over 500,000 reviews and audits annually. Small businesses are 3x more likely to be audited than large companies.
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Average professional fees for a tax audit: $8,500+. Complex audits can cost way more.
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You cannot buy this after the ATO contacts you. Cover must be in place before the audit begins.
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From 1 April 2025, the ATO extended its BAS refund-withholding window from 14 to 30 days, a signal of increased scrutiny across all lodgement types.
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The ATO now matches over 1 billion transactions annually using AI and machine learning and automated flags have increased audit selection rates for small businesses.
Table of Contents
Who is this for?
The policy is designed for:
- Small businesses and sole traders
- Companies and partnerships
- Company directors (personal returns — via the Director’s extension)
- SMSF trustees
- Anyone who lodges tax returns through a registered tax agent
If you use an accountant to lodge your returns, you have audit exposure. This policy exists to protect you from the professional cost of dealing with it.
Important: Returns must be prepared by a registered tax or BAS agent. DIY lodgements are not covered.
Do you need it?
Yes, if: You lodge business tax returns through an accountant and would struggle to absorb $10,000+ in unexpected professional fees.
Particularly relevant if: Your business has contractor arrangements, significant asset purchases, a cash component to revenue, or multiple entities, all of which statistically increase ATO audit likelihood.
Probably skip it if: You’re a very simple sole trader with minimal income, no employees, no GST registration, and consistently straightforward returns.
What can Tax Audit Insurance cover?
Coverage varies between policies. The following shows what Tax Audit Insurance can cover – your specific policy will define which of these apply.
ATO review or investigation type |
What’s covered |
|---|---|
|
GST return investigation |
Accountant fees to respond, prepare documentation, negotiate |
|
PAYG withholding review |
Accountant and legal fees, ATO meeting representation |
|
Fringe Benefits Tax (FBT) dispute |
Specialist adviser costs for FBT calculations and disputes |
|
Income tax audit |
Full professional representation during ATO review |
|
BAS discrepancy investigation |
All reasonable fees to respond and clarify |
|
Payroll tax audit (state revenue) |
Some policies extend to state revenue office audits |
|
Director’s personal return |
Covered under the Director’s Personal Returns extension |
|
SMSF audit |
Covered under the SMSF extension |
What Pocket’s Tax Audit Insurance includes
Pocket’s policy covers all audit types listed in the table above, including the Director’s Personal Returns and SMSF extensions. The following reflects Pocket’s specific policy terms — limits and features will vary between insurers.
- Standard cover: up to $100,000 per audit
- With reinstatement: up to $200,000 total (limit reinstates once after a settled claim)
- No excess on professional fees – you don’t pay a portion of each claim
Read more: Pocket Tax Audit Insurance product page
What Tax Audit Insurance does not cover?
The following are some of the key exclusions that apply to Pocket’s policy — this is not an exhaustive list. Always read the PDS for full details before purchasing.
Not covered |
Why |
|---|---|
|
Additional tax, penalties, and interest |
You’re responsible for any tax the ATO assesses — this covers professional fees only |
|
Returns not prepared by a registered tax agent |
DIY lodgements are generally excluded. Some exceptions apply — see PDS for details. |
|
Audits that began before you bought the policy |
Pre-existing ATO notices are not covered |
|
Criminal investigations |
Fraud or tax evasion prosecutions are excluded |
|
Routine enquiries |
Simple data requests that don’t escalate to a formal audit |
|
Deliberate misstatements |
Intentional errors or false declarations |
Key point: You cannot buy this after receiving an ATO audit notice. If you’re waiting to see if the ATO contacts you before getting cover, you’re already too late when they do.
When are you most likely to be audited?
The ATO uses data matching and AI to identify audit targets. Certain business profiles attract more attention:
Audit risk factor |
Why the ATO flags it |
|---|---|
|
Large or unusual deductions relative to income |
Pattern inconsistency vs similar businesses |
|
Cash-heavy businesses (hospitality, trades, retail) |
Higher shadow economy risk |
|
Rapid revenue changes year-on-year |
Unexplained fluctuations trigger review |
|
Related party transactions |
Potential for non-arm’s length dealings |
|
Multiple business structures |
Complexity and opportunity to shift income |
|
Contractor-heavy workforce |
PAYG classification and SGC obligations |
|
Late or inconsistent BAS lodgement history |
Flags non-compliance pattern |
|
GST turnover near key thresholds |
Registration and reporting obligations |
Even if none of these apply to you, the ATO conducts random audits as part of its broader compliance program. The ATO’s 2025 crackdown — including forced monthly BAS reporting for 3,500 businesses and the extended 30-day refund-withholding window — signals that audit activity is increasing across the board.
Real cost scenarios
The following scenarios are illustrative examples only, based on how Pocket’s Tax Audit Insurance policy would apply. Actual costs and outcomes will vary significantly depending on complexity. Always refer to the PDS for full policy terms.
Scenario 1: GST dispute
The ATO questions your GST claims for the past three years. Your accountant spends several weeks gathering records, preparing documentation and negotiating with the ATO on your behalf. Professional fees: $18,000. Professional fees of this nature are eligible for cover under a Tax Audit Insurance policy.
Scenario 2: PAYG contractor classification
The ATO investigates whether you’ve correctly classified contractors vs employees. They audit three years of PAYG withholding. Your accountant and lawyer both respond. Professional fees: $32,000. Professional fees of this nature are eligible for cover under a Tax Audit Insurance policy, subject to policy terms and limits.
Scenario 3: Director’s personal return concurrent with business audit
The ATO audits your company, then extends the review to your personal return as director. Two audits running simultaneously. Combined professional fees: $45,000. If you have Business + Directors option, fees of this nature are eligble for cover under a Tax Audit Insurance policy, subject to terms and conditions.
Scenario 4: FBT review
The ATO questions your Fringe Benefits Tax calculations on company vehicles and entertainment. Complex specialist advice required. Professional fees: $22,000. Professional fees of this nature are eligible for cover under a Tax Audit Insurance policy, subject to policy terms and limits.
How to get covered through Pocket
Pocket’s Tax Audit Insurance is available online – instant quote, instant cover.
Coverage options
Option |
Best for |
|---|---|
|
Business Audit Only |
Sole traders and small companies — business returns, GST, PAYG, FBT |
|
Business + Directors |
Company directors who want personal return cover included |
|
Individual Cover |
High-income individuals — personal returns only |
|
SMSF Cover |
SMSF trustees needing super fund audit cover |
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Quote takes 2 minutes
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Certificate issued instantly on payment
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Cover starts immediately or on a future date of your choice
If the ATO contacts you after you’re covered
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Notify Pocket within 60 days — online at withpocket.com.au/make-a-claim, email claims@withpocket.com.au, or call 1300 475 092
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Forward the ATO notice and any subsequent correspondence
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Engage your registered tax agent to begin responding
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Hold onto all invoices from your accountant and legal team during the audit — these are what your claim will be based on
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Submit fees for assessment when the audit closes — approved claims are typically processed within 2–4 weeks. However, this may vary depending on the complexity of the claim.
Frequently asked questions
- What is Tax Audit Insurance in Australia?
Tax Audit Insurance covers the professional fees (accountant and legal costs) you incur when the ATO selects you for a tax audit or investigation. It does not cover additional tax, penalties, or interest. Pocket offers Tax Audit Insurance with instant online quotes at direct.withpocket.com.au/business-protection/tax-audit-insurance/. - Does Tax Audit Insurance cover the tax I owe?
No. The policy covers professional fees only. Any additional tax, interest, or penalties the ATO assesses remain your responsibility. - Can I buy Tax Audit Insurance after the ATO contacts me?
No. Cover must be in place before the audit begins. If you’ve already received an ATO audit notice, that audit is excluded. You can still buy cover to protect against future audits. - What types of ATO audits are covered?
Under Pocket’s Tax Audit Insurance policy, covered audit types include GST return investigations, PAYG withholding reviews, income tax audits, FBT disputes, and BAS discrepancy investigations. The Business and Directors Audit option adds cover for director’s personal tax returns. SMSF audits require the SMSF cover option. See the PDS for the full list of covered audit types. - Do I need Tax Audit Insurance if I have a good accountant?
Yes — they’re different things. Your accountant prepares and lodges your returns. If the ATO audits those returns, your accountant will charge you to defend them. Tax Audit Insurance covers those defence fees. - What if the ATO just sends a routine enquiry letter?
Routine requests for clarification that don’t constitute a formal audit are not covered. If a simple enquiry escalates to a formal audit, cover applies from the point it becomes formal. - How much should I insure for?
At Pocket, we find that most small businesses opt for $100,000 with reinstatement, giving a total of $200,000 in coverage. Simpler businesses may only need $50,000. If you have multiple entities, high-value assets, or contractor arrangements, it’s worth considering a higher limit. - Is Tax Audit Insurance tax deductible?
Tax Audit Insurance premiums are generally tax deductible for businesses as a cost of managing tax compliance. Confirm with your accountant for your specific structure. - What’s the difference between Tax Audit Insurance and Management Liability?
Tax Audit Insurance covers the professional fees for ATO audit defence. Management Liability covers a much broader set of director and corporate risks — including Director Penalty Notices, insolvent trading claims, and employment disputes. Many policies include a Tax Audit extension, but a standalone Tax Audit policy is often better value if that’s your primary concern. - How much does Tax Audit Insurance cost?
Premiums vary based on your business size, structure, and the level of cover you select. Get an instant quote via Pocket Direct → to see your specific price — it takes two minutes. As a general reference, cover for a sole trader or simple small business is typically a fraction of the professional fees a single audit would generate.
Related guides
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With Pocket is a business name of Insurance Services Holdings Pty Ltd (ABN 36 612 629 295, AFSL 491165). Member of NIBA. Part of the Steadfast Group. This article is general in nature and does not constitute financial or tax advice. Sources: ATO (ato.gov.au), Pocket Tax Audit Insurance product page (direct.withpocket.com.au/business-protection/tax-audit-insurance/).
