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.

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:

Policies can cover things such as:

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.

An insurer will generally need: