You may have heard about products being sold as tax liability insurance for businesses. It sounds
comforting: pay a premium, and if the IRS comes knocking or the numbers are off, an insurance company
steps in. But for most closely held small and mid-sized businesses, chasing tax liability insurance can
miss the point.
What Is Tax Liability Insurance?
There’s no standard definition or regulatory language on tax liability insurance. Brands that provide it
create their own, custom product offerings. In general, many of these policies claim to pay some or all of
an unexpected tax bill, “protect” against IRS or state audits, and “shift” risk of penalties and interest if something is done wrong. But it’s important to note: No off‑the‑shelf policy can simply cover your normal
income and payroll tax obligations. Taxes are a cost of doing business, not a typical insurable risk like a
fire or a slip‑and‑fall claim.
Is Tax Liability Insurance Necessary?
We’re not in the business of recommending or discouraging insurance policies but, as tax professionals,
we can confidently tell you that tax liability insurance does not replace other critical business insurance
policies. These may include:
–General liability and property insurance.
–Workers’ compensation insurance.
–Professional liability or errors and omissions (E&O) insurance.
Whether tax liability insurance should be added to the mix is an entirely individual decision. They’re often
marketed toward businesses that are at high risk for large-scale tax surprises, including those involved in
mergers and acquisitions or private equity deals.
Other Considerations
Before trying to insure your tax bill, consider how you might reduce the bill and the risk in the first place.
The first step in doing this is choosing reputable business and financial advisors who carry appropriate
professional liability insurance themselves. If your tax preparer, bookkeeper, or payroll provider makes a
serious mistake that leads to penalties and interest, you want them to be properly insured and willing to
stand behind their work. That doesn’t erase your responsibility to the IRS, but it may help offset the added
burden.
Then, do what you can to eliminate the risks of tax surprises through strategic planning. Fine-tune your
entity structures; time income, deductions, and major transactions wisely; and clean up your books so
that your returns are accurate and defensible. In our experience, owners who invest in this kind of planning often save far more in reasonably incurred taxes, penalties, and professional fees than any
hypothetical tax liability insurance will.
Therefore, bigger-picture questions to ask are:
–Do I have adequate general and professional liability insurance for my needs?
–Do I have the right advisory team in place?
–Is my CPA proactive, strategic, and experienced, and do they carry adequate liability insurance
themselves?
Accepting that breathtaking tax surprises are a fact of business is the wrong approach. These types of
surprises often accompany poor planning. Before jumping on tax liability insurance to insure your tax bill,
ask whether anyone on your team is actively working to reduce it and to manage the risks around it.
Feel free to contact us with questions (210) 691-3133 or visit www.bankler.com
Shutterstock__2472122013 | July 14, 2026