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Posted by George Cobleigh on May 26, 2022 4:03:56 PM


The current tax environment is complex, leaving many taxpayers feeling uncertain about their existing tax positions and future plans. In the face of an IRS audit or challenge, one unexpected tax liability can do severe damage, leading to a failed transaction or loss of expected tax benefits.

As a result, many taxpayers are taking advantage of tax insurance to minimize their risk. Tax insurance is designed to help protect individuals and entities from the financial consequences of an audit or tax dispute.

This article will discuss the benefits of tax insurance in the Private Equity and Venture Capital (PE/VC) context and provide tips on obtaining it.

What Is Tax Insurance?

When taxpayers purchase tax insurance, they are essentially buying protection against known financial risks. There are a variety of tax risks that businesses may face, and each one requires a different approach. As such, there is no one-size-fits-all solution for tax insurance. However, there are some common terms and features of tax insurance policies.

Generally, the risk being insured needs to have a comfort level of at least “more likely than not.” One of the critical terms of a tax insurance policy is the policy period, which is the length of time your policy is in effect, and during which claims are covered. Many policies typically offer a seven-year coverage period for tax liabilities to address the six-year IRS statute of limitations. Coverage typically includes fines, penalties, interest, legal costs, and tax gross-ups. In addition, coverage for claims could range from $5 million to $1 billion, depending on your provider.

Tax insurance is most often used by PE/VC firms in merger and acquisition (M&A) transactions, but other insured risks may include tax positions a portfolio company currently uses or is planning to use.

Why Is Tax Insurance Beneficial?

When two companies come together in a merger or acquisition, there are always potential tax implications. In some cases, the tax consequences can be so significant they can make or break the deal. Rather than negotiating over a price adjustment, indemnity, or escrow, a onetime insurance cost may be the best option to complete the deal successfully so both parties can achieve their desired outcome. It also provides more certainty and allows buyers and sellers to focus on the business transactions at hand rather than determining the potential for unexpected tax liabilities.

As opposed to a representations and warranties policy on unknown risks, tax insurance covers a more specific tax risk that is known to the insured party.

In recent years, taxpayers are becoming increasingly aware of the importance of tax insurance, using it to hedge against a wide variety of risks outside the M&A realm. Using it as a strategic risk management tool for portfolio companies can protect them from exposure to future IRS challenges and provide certainty to its tax positions, which also aids in the eventual sale process. Tax insurance also reduces the need for escrow proceeds and other terms that delay the closure of the deal and final proceeds. In addition, in many cases, tax insurance for a single party is offered at a lower cost than amid an M&A transaction.

How Do I Obtain Tax Insurance?

The first step to obtaining tax insurance involves connecting with a broker who will help you detail your tax risks and gather supporting materials for your submission to underwriters. The underwriting process is the next step, eventually creating the individualized policy and official coverage.

Having a solid adviser is the most crucial aspect of obtaining a tax insurance policy. A submission that showcases thorough research and thoughtful analysis provides more comfort to underwriters, leading to better policy terms and even lower premiums. Underwriters also expect a taxpayer’s advice to come from a reputable source.

Context is essential as well when it comes to obtaining a tax insurance policy. It’s important to realize that the underwriters who review your submission will also note whether you are provided tax advice during your routine tax planning and preparation throughout your ordinary course of business. Underwriters may see you as a higher risk if you are not since your submission may be less neutral and more advocatory. Regularly consulting with your tax advisor about your risks and plans can help make you a stronger candidate for tax insurance in the long run.

Next Steps

Many tax issues are unique, and so are the terms of insurance coverage used to cover the possibility of loss. A wide range of tax positions are insurable, and taxpayers should consider discussing the possibility of a tax insurance policy when consulting with their tax adviser. While an M&A transaction has generally been the more common impetus for tax insurance, ongoing portfolio company tax issues are quickly becoming more common.

If you would like to consult with a tax professional about pursuing tax insurance or have any questions about the process, please contact us.


George-Cobleigh-Print ColorGeorge Cobleigh is a Tax Managing Director and is a member of the Private Equity & Venture Capital Practice. He can be reached at 401.626.3201 or




© Copyright 2022 CBIZ, Inc. and MHM. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

Tags: Taxes, Insurance, Private equity, venture capital, Private Equity & Venture Capital, PE/VC, portfolio companies, tax insurance

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