Tax Liability Insurance

Not all tax positions are created equal. Many times, taxpayers find themselves stuck firmly between black and white leaving themselves exposed to the IRS disallowing a position taken from a good faith reading of the tax code. In situations like these, taxpayers can turn to tax liability insurance.

What Is Tax Liability Insurance?

It’s an insurance policy that can be structured to cover the tax liability, interest, penalties, and other costs associated with an unsuccessful defense of an identified and supportable tax position. This can even include a gross-up since the insurance proceeds are often taxable. Policies are very common in M&A transactions because there are significant tax implications with the transactions and these policies allow the parties to transfer much of the risk to an insurer and eliminate the need for significant negotiation around the allocation of risk. Policies typically have terms of 6 or 7 years due to the IRS lookback period.

Policies can cover all forms of taxation, including:

  • Corporate income tax
  • Capital gains tax
  • Property tax
  • Personal income tax
  • Sales tax

Policies can cover things such as:

  • S-corp. status
  • REIT status
  • NOLs
  • Low-income housing tax credits
  • Solar investment tax credits

What Are the Costs?

Pricing is typically a function of the liability limit of the policy, but can be influenced by various factors, a few of which are the strength of the tax position, which jurisdictions are in play, and any precedent from previous rulings on the tax position. There are also deductibles or amounts retained by the insured, but they are typically small. Insurers will also perform due diligence on the risk being insured and they may pass along the costs of that due diligence to the insured. Intermediaries can negotiate with multiple insurers on your behalf.

What Types of Information Are Needed to Issue a Policy?

An insurer will generally need:

  • Detail of your tax position
  • If M&A:
    • Detail of the transaction structure and experts involved
    • Description of all tax issues and calculation of potential benefits and losses for each party
    • Tax opinion

Contact Us

For more information on this topic, please contact a member of Withum’s Insurance Services Team.