When it comes to tax preparation, the idea of audit protection can be enticing. Many tax preparation companies and software programs offer this service as an upsell, promising to assist you if the IRS comes knocking. But is it really worth the extra expense? Let’s break down what audit protection is, how much it costs, and whether it’s a good investment for you.
Understanding Audit Protection
Audit protection is an additional service offered by tax filing companies. It promises to assist you if you receive a notice from the IRS. This assistance can include helping you understand IRS communications, drafting response letters, and even reimbursing you if the tax preparer made a mistake. However, it’s important to note that audit protection does not prevent you from being audited. The IRS has the right to audit anyone, and the process is partially random.
Will Audit Protection Actually Help You?
The IRS is generally reasonable in its audit process. Audit letters are usually clear about what the IRS needs. In most cases, individuals undergoing an audit need to provide personal records, such as business records, receipts for rental properties, and other tax-related documents. If you maintain good records, an audit should not be a significant issue. The audit might reveal a contentious deduction, but good record-keeping will mitigate most of the pain.
Unfortunately, online tax filing services cannot create good records for you. You need to maintain these records throughout the year. While having an expert draft letters for you has some value, it is not as beneficial as having good records. In fact, spending money on bookkeeping software is often a better use of your funds than purchasing audit protection.
How Much Does Audit Protection Cost?
The value of audit protection depends largely on its cost. H&R Block offers free in-person audit support for those who purchase their software (not online filing). This can be a compelling reason for self-employed individuals, landlords, and investors to choose H&R Block over online filing. However, if you have a basic filing situation, the free audit support may not be worth the additional cost.
TurboTax requires you to pay at least $60 to upgrade to “Audit Defense.” This seems like a high price for a minimal service guarantee. On the other hand, FreeTaxUSA and TaxHawk offer audit assistance for $19.99, which seems more reasonable for those with complex taxes.
Who Should Consider Audit Protection?
If you have simple taxes, such as a W-2 job and a few 1099-INT forms, audit protection is probably not worth the cost. However, if you take advantage of every tax-advantaged account, have multiple businesses, and invest in MLPs, you will have a lot of records to manage. Even with good record-keeping, you might need help explaining your unique situation to the IRS.
While I am generally wary of recommending audit protection to most people, I understand the appeal of peace of mind. If you can get audit protection for free or at a very low cost, it might be worth considering. Personally, I prefer to invest in bookkeeping software, which I believe offers better value for the money. However, if you decide to purchase audit protection, I recommend choosing FreeTaxUSA or H&R Block to get the most protection for the least cost.
Audit protection can provide some peace of mind, but it is not a substitute for good record-keeping. Before deciding to purchase audit protection, consider the cost and the complexity of your tax situation. For many people, investing in bookkeeping software or maintaining thorough records will be a better use of their money. However, if you find yourself in a complex tax situation and need additional support, audit protection might be worth the investment.