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Knock, Knock

Should the IRS come calling, your welcome mat had better read `insured.'

Does the thought of an IRS audit send chills down your spine? Unexpected unpaid taxes compounded by interest and penalties can play havoc with any entrepreneur's budget. Even the cost of defending yourself at an audit--whether or not additional taxes are assessed--can be significant. But a new insurance product can protect individuals and sole proprietors from the expenses related to an audit.

Audit Protection Insurance Services Inc. (API) of Santa Rosa, California, has developed an insurance policy that pays the additional taxes and interest brought on by audits, as well as the cost of representation by a tax professional, up to a designated limit. If you file a Schedule C, premiums start at $236 for $3,000 in coverage and go up to $486 for as much as $10,000 in coverage. Tax returns are covered for four years--one year longer than the period covered by the IRS' statute of limitations for audits. Of course, the policy doesn't cover fraud--so you aren't protected if you lie on your return and get caught.

Currently, audit protection insurance is available in California for professionally prepared individual tax returns, with or without a Schedule C. Coverage will be extended next year to personally prepared individual returns, and will expand to nationwide in 2001.

If you're not eligible for audit protection coverage this year because you have a troubled audit history or your tax returns aren't professionally prepared (next year, both personally and professionally prepared documents will be eligible), you can opt for API's IRS representation service, which is currently available nationwide for both personally and professionally prepared returns. For $195 per year, API will pre-audit your return prior to filing and represent you with the IRS should you be audited. This doesn't cover taxes or penalties, however. Both products can be purchased at

This story appears in the August 1999 issue of Entrepreneur. Subscribe »