Tax liability insurance sounds like a complicated subject. However, with the help of Hauser Insurance, it doesn’t have to be. Here are a few things you need to know about when it comes to tax liability insurance within business transactions.
What Is Tax Liability Insurance?
Tax liability insurance, sometimes known as TOL, is a form of insurance that protects taxpayers against the failure of a tax position in connection with an accounting treatment, transaction, reorganization or any type of taxable event. In simpler terms, it covers losses you might incur if the IRS or other taxing authority deems that you have a greater tax liability than what you have claimed.
What’s The Purpose?
When there is a potential tax exposure, tax liability insurance could supplement a seller’s indemnity. It functions similarly to a warranty, representation, or indemnity insurance policy, also known as RWI. However, RWI insurance and tax liability insurance are different in the way they function in the circumstance of a known versus unknown tax exposure. An RWI policy typically excludes all known risks from coverage compared to a tax liability policy.
Known risks, also known as potential tax liabilities, are often included in schedules supporting the purchase agreement or are made known during the tax due diligence period. According to risk experts Hauser Insurance, if you plan correctly, the tax liability insurance policy’s targeted coverage can start at the point where the RWI policy coverage comes to a halt.
How Accessible Is Tax Liability Insurance?
Typically, tax liability insurance is more expensive than an indemnity insurance policy. However, tax liability insurance ranges between 3-6% of the limit purchased. Breaking the risk into layers with the highest layers being cheaper than the primary layers (layering) is done to bring the overall price down. This happens when a large limit is required, easing the business owner’s wallet.
Being Strategic About It
Sellers who expect a merger or acquisition can also obtain tax liability insurance. Before participating in the transaction, the seller would have to purchase a policy that comes with known risks and provide potential buyers with a more appealing bidding environment.
In addition, a tax liability insurance policy has the ability to offset or replace the need for a seller’s special indemnity, an escrow or a purchase price adjustment. In other words, a buyer might only require escrow related to an already known tax exposure for the tax liability insurance policy’s retention amount. Hauser Insurance can help you strategize and navigate the complexity of this process.
Tax liability insurance, when well crafted, can be a policy well-positioned to execute the closing of a merger or acquisition. In the long run, this will help you and your business be financially intelligent about your choices. Additionally, it can play a crucial role in successfully facilitating other transactions with identified tax exposures or tax-specific indemnities.
Unsure how to navigate a tax liability insurance policy? Contact Hauser today by filling out the quick contact form on the Hauser Insurance website.