Covering Your Assets
Risk Capital Partners, a specialty insurance brokerage and consultancy, has reengineered traditional tax insurance in cooperation with leading insurance carriers to specifically address the tax risks associated with legitimate wealth preservation techniques. These insurance policies are typically structured to cover the entire statute of limitations period under the tax code for a transaction, and can be designed for both past and current transactions. Policy limits can be set to include unanticipated legal costs, penalties and fines, in addition to any actual taxes that might be due. Tax insurance transfers all the risks to the insurance company for a one-time premium payment, which is typically a single-digit percentage of the total tax and penalty liability.

Tax insurance is not widely understood, most likely because those legal and accounting advisors most suited to suggest this option—the purveyors of opinion letters—would find it difficult to charge fees for authoring a comfort letter and then later advise that the same opinion should be insured.

The IRS view of tax insurance is, surprisingly, supportive. While it might seem as if it would regard tax insurance as a red flag for questionable transactions, the opposite is true.  The IRS views tax insurers as the only nongovernmental entities motivated to judge tax positions conservatively. Tax insurers are not paid for providing artful opinions or for promoting creative transactions. Instead, they are compensated for prudently assessing a tax position. Tax insurance is a testament to a deal’s propriety because it shows that a conservative insurance underwriter was willing to risk its own capital and that of its reinsurers on the validity of a tax strategy. William O’Shea, a deputy associate chief counsel at the IRS, has stated: “There are a lot of legitimate reasons for having tax insurance. Really it is more like a green flag.”