When I started working in 2003, I did all my own taxes with Turbotax.
My tax situation was simple, I could use the free edition, and it took all of about an hour to complete.
I did that for years until I ran my business and needed to hire a bookkeeper and an accountant. Now, they prepare my taxes each year after I spend an hour or so putting together the documents and filling out their binder of tax questions.
And every year, after they finish my taxes, they always attach a page to the front – audit protection. And it costs hundreds of dollars.
But is it worth it? Or should I consider other options?
Table of Contents
Will You Get Audited?
The IRS can audit you for a variety of reasons. It can be as simple as mistyping a number or as complex as checking on a claim you made on your tax return.
If you’re worried that you’ll get audited, don’t be. It’s rare. (of 196 million tax returns from 2016, only 0.5% were examined)
I’ve been “audited” twice – but they weren’t real audits. I was sent CP2000 letters that asked for additional clarification because some numbers didn’t match up. In both cases, we explained the error, the IRS accepted the answer, and they accepted our explanation.
What is Audit Defense Protection?
My accountant offers what they call an “Audit and Notice Protection Plan” which offers covers:
Peace of Mind Audit and Notice Protection Plan
This plan is offered to our clients on a discretionary basis to minimize professional fees in the events of an IRS audit or notice inquiry related to your [YEAR] individual federal or state tax return. We are offering this plan because of the increased volume of tax notices issued by taxing authorities. Increased investment in computer technology and matching programs used by the taxing authorities has increased the volume of notices. Our experience in these situations has been that a majority of these notices are incorrect, but nonetheless have to be responded to. Additionally, IRS audit rates increased in 2002 for the first time in six years and the outlook for future years is a continued increase. Our normal billing rate for these situations is $150.00 per hour. Response to a notice alone could run in excess of $150. An audit can run into the thousands of dollars depending on the circumstances. This plan does not cover any tax, interest or penalties charged. Any out of pocket expenses will be billed separately.
Tax Notice Protection
Under this plan, we will respond to any tax notices you receive for the tax year you purchase the plan up to the appeals level. We will work on the matter until a final resolution is reached regarding the tax notice. If you do not purchase the plan we will bill you for any time involved in response to notices.
This plan will also cover you in the event that you are audited by any taxing authority, up to the appeals level. There is no guarantee given to you relative to the outcome of any examination. However, we will exert our best efforts to obtain a satisfactory settlement of any issues that may arise in the examination. This examination will cover only examinations made by the Civil Division(s) of the respective Federal and State taxing authorities and will not cover any situation where the examination is made by the Criminal Division(s). If you do not purchase the audit protection we will represent you in the event of any audit but will bill you at prevailing rates.
The cost of the protection was $600.
I’ve never paid for the audit protection and in the decade or so of tax returns, never had a significant issue but that’s often the case with insurance-like products. You pay a little for protection and you hope you never need it.
Saying no to a $600 insurance plan is pretty easy… but there are ways to get audit protection for free.
Credit Karma Audit Defense
When you prepare your taxes using Credit Karma Tax, you get audit defense for free. But just recently, they announced that they would offer audit defense for free to everyone, regardless of where you prepared your taxes, if you are eligible (more on that below).
What do you get from Credit Karma with Audit Defense? Sign up and if you are audited, Credit Karma will get you a Case Resolution Specialist (CRS) to help guide you through the audit process.
This is what they offer:
- Consultation regarding taxing authority correspondence from a specific Case Resolution Specialist (“CRS”) who is appropriately qualified or credentialed and who will be primarily responsible for your case.
- Document review, collection and organization from the CRS. If necessary to respond, the CRS will identify documents that need to be collected, assist with organization of the documentation, prepare a professional response portfolio, and review and discuss it with you before sending to the taxing authority.
- Written correspondence with taxing authorities. If necessary, the CRS will draft letters and other written correspondence on your behalf, as needed, to respond to inquiries or demands from a taxing authority.
- Conferences and Hearings with Taxing Authorities. The CRS will attend the conference or hearing on your behalf to act as your advocate before the taxing authority.
- Assistance with tax debt resolution options, if applicable.
- Assistance with identity theft, if applicable.
And it’s 100% FREE.
Are you eligible?
One downside – not everyone is eligible.
To see if you are eligible, you need to confirm you’ve filed your 2018 and be willing to give Credit Karma access to your 2018 tax transcript. You will do this by electronically signing IRS Form 4506-T – Request For Transcript of Tax Return.
Here’s an enumerated list of returns that are not eligible:
- Non-resident Returns (1040NR or 1040NR-EZ).
- Returns other than individual returns including, but not limited to, corporate, partnership, trust, estate, gift and employment returns.
- Returns in which you had actual knowledge of additional taxes owed as of the date you enrolled in the Program.
- Returns prepared with negligence, recklessness, intentional misrepresentation, or fraud.v
- Local, city, and county tax Returns.
- Returns that have become subject to IRS or state criminal investigations.
They also will not cover you if you have “pre-existing conditions,” meaning the IRS or state taxing authority has already started reviewing your tax return. You can’t get a letter and then sign up for the service. They also won’t be able to help with inquiries related to foreign income, pass through entities, court awards & damages, bartering income, estate and gift tax, canceled debt, and these credits:
- Foreign Tax Credit (Form 1116)
- Qualified Plug-In Electric Drive Motor Vehicle Credit (Form 8936)
- Residential Energy Efficient Property Credit (Form 5695)
- Mortgage Interest Credit (Form 8396)
- Credit to Holders of Tax Credit Bonds (Form 8912)
- Credit for Prior Year Minimum Tax (Form 8801)
- Credit for Excess Social Security Tax
- Railroad Retirement Tax Withheld (Form 1040, Schedule 5, Line 72)
It looks like they’ve excluded some of the obvious exclusions (returns that the IRS has identified as under review) and some of the more esoteric ones (county tax returns, which few counties have).
Do You Need Audit Defense?
If you have a relatively simple tax situation and you didn’t do anything shady, probably not.
But Credit Karma is offering it for free… why wouldn’t you get it? The only argument I can make against getting it is if you’re uncomfortable with Credit Karma getting access to your tax return. The likelihood of getting audited is low and the likelihood of your data being stolen is also low, so you have to decide if that’s a tradeoff you want to make.
My thinking is that they’re offering this so that they can offer you Credit Karma Tax services next year. I don’t know if that’s a bad thing considering Credit Karma Tax was free this year, with no upsells.
Personally, I’ll be giving this a closer look when my return is finished (we requested an extension) but it looks appealing to me so far.
What are your thoughts?