Is Tax Audit Protection insurance worth the money?

Question

TurbaTax is offering me Tax Audit protection for $49.95. If my tax return is randomly selected for audit they will represent me.

Is this service worth the money?

Answer 1

It depends on how complex your return is.

If the only reason you are not using the 1040EZ is because you are over the $ limits, you probably don't need the audit insurance.

Look at the sources of your income. A W-2 per person, some 1099's from your bank, and you take the standard deduction because you rent, you probably don't need it.

If you are a day trader, and you claim to have a home office, and your return runs dozens of pages, it might not be a bad deal.

Answer 2

I agree with mhoran_psprep's answer, but would like to add a few additional points to consider.

TurboTax and the professional it will send to represent you in case of a tax audit have no more information about your tax return than what you entered into the program. Now, there are three (or four) different kinds of audits.

• The correspondence audit is the most common kind where IRS sends a letter requesting copies of documents supporting a deduction or tax credit that you have claimed. Representation is hardly necessary in this case.

• The office audit is more serious where you have to make an appointment and go to the local IRS office with paperwork that the examining agent needs to see physically, and to answer questions, etc. It would be better to be accompanied by a representative at these meetings. But, office audits are not as common as correspondence audits, and, because they are expensive for the IRS, usually occur when the IRS is fairly sure of recovering a substantial sum of money. If you have been cutting corners and pushing the envelope in taking large enough deductions to make it worthwhile for the IRS to go after you, you probably should not have been using TurboTax to file your income tax return but should have been using an accountant or tax preparer, who would be representing you in case of an audit. If the reason that you used TurboTax is that no accountant was willing to prepare a tax return with the deductions that you wished to claim, I doubt that having TurboTax's representative with you when you go to the IRS office will help you all that much.

• An example of a field audit is when the IRS agent comes to your home to see if you actually have a space set aside to use exclusively as your home office as you claimed you did etc.

• A Taxpayer Compliance Measurement Program (TCMP) audit is where the IRS randomly chooses returns for statistical checks that taxpayers are complying with the regulations. The taxpayer has to prove every line of the return. You claim to be filing as Married Filing Jointly? Bring in your marriage certificate. Submit birth certificates and Social Security cards of your dependent children. And so on. Yes, having TurboTax represent you for only $49.95 will help, but not if you are not married and cannot provide the IRS with a marriage certificate etc.

So, pay the fee for peace of mind if you like, and as insurance as littleadv suggests. But be sure you understand what you might be getting for the money. Most tax returns selected for audit are selected for what the IRS believes are good reasons, not at random. If what you said

If my tax return is randomly selected for audit they will represent me.

is interpreted literally, TurboTax will represent you only if your return is selected for examination under the TCMP program, not if it is selected for audit because the IRS believes that something is fishy about your return. And as always, you get what you pay for.

Answer 3

I think it is, unless you have another protection. For example, I have a legal plan sponsored by my employer that amongst other things, covers representation in case of audits for personal taxes.

If, however, you don't have any other legal plan to cover this, I'd suggest getting the TurboTax audit protection. Hiring a professional to represent you in case of an audit will cost several hundreds of dollars per hour. Of course chances are slim, but that's the nature of insurance.