Is your tax preparation business prepared to face a lawsuit? Even though you strive for accuracy on every return, mistakes can and do slip through. Having the proper professional liability insurance in place protects you from significant financial loss.
Here’s what you should know:
What is professional liability insurance aka E&O Insurance?
Professional liability insurance, also called errors and omissions insurance, protects you and your business if you’re sued for professional error or negligence. Typically, E&O insurance covers your legal fees and anything you must pay to the plaintiff.
For tax preparers, this means you’re protected if a client sues for damages due to your mistakes.
What is covered by E&O Insurance for tax preparers?
E&O insurance for tax preparers provides crucial protection against claims of negligence, malpractice, or errors in tax return preparation. This coverage typically includes legal defense costs and potential settlements or judgments arising from claims related to incorrect tax calculations, missed deductions, or failure to file returns. E&O insurance is essential for tax preparers to safeguard their professional reputation and financial stability.
Can tax preparers be held liable?
Tax preparers can be liable for errors on their clients’ tax returns. If a tax preparer is negligent, provides erroneous advice, or fails to properly prepare a tax return, they may be subject to legal action. This could result in financial penalties, reputational damage, and even loss of professional licenses and certifications.
When do tax preparers need tax preparer’s liability insurance?
Some businesses and clients require any tax preparer they work with to carry E&O insurance. Generally, the bigger the business, the more likely they will require proof of E&O insurance.
Even if none of your clients require it, it’s still wise to invest in tax preparer liability insurance as soon as you start your business. Tax preparers can be sued for any mistakes that result in financial loss to their client. If a client faces audits, interest, or penalties from the IRS due to your mistakes, there’s a decent chance they’ll sue for the damages.
How much will an E&O policy cost me?
According to Insureon, professional liability insurance cost for tax preparers is less than $30 per month, on average, for a policy with a $500 deductible.
Of course, this is only a rough estimate. Your tax preparer liability insurance premium will ultimately depend on the size of your business and how much coverage you require. Working with larger clients means your errors could be more costly, so you’d need more coverage than a tax preparer working with smaller businesses and clients.
Comparing Business Owners Policy (BOP) vs Home Office Insurance
If you have a brick-and-mortar location, you’ll need a business owner’s policy with property and liability coverage. This policy covers your building and equipment and provides professional liability insurance if someone gets injured on your property. Nearly every small to medium business with a physical location carries it.
If you work from home, you may consider home office insurance. Like a BOP, home office insurance protects your business equipment. Some policies also offer liability coverage for injury on your property, although you can reasonably forgo this coverage if you work primarily with remote clients. You can usually purchase home office insurance as an add-on to your homeowners’ policy.
Hopefully, your attention to detail will prevent you from ever needing to use your E&O insurance. If you are sued, however, proper insurance can make the experience far less stressful and expensive.
What other types of insurance do I need as a tax preparer?
While errors and omissions insurance is the most vital, your practice may need other types of insurance to be fully protected.
Cyber liability insurance
Cyber liability insurance covers losses arising from data breaches, cyberattacks, and other digital security incidents. This type of insurance for tax preparers can be crucial to protect against potential financial losses, legal liabilities, and reputational damage in the event of anything from a hack that results in theft of sensitive client data to client identity theft resulting from a data breach.
Commercial property insurance
Commercial property insurance provides coverage for losses or damages to your business property, including your office space, equipment, and inventory. If you own or lease office space and have valuable equipment, this type of tax preparer insurance can help protect against financial losses due to fire, theft, vandalism, or other covered perils.
Workers’ compensation insurance
Workers’ compensation insurance provides coverage for employees injured or ill while on the job. If you have employees, workers comp will help protect your tax business from financial losses and legal liabilities arising from workplace injuries or illnesses. It’s also required of employers in most states. Workers’ compensation insurance can help cover medical expenses, lost wages, and rehabilitation costs for injured employees.
General liability insurance
General liability insurance provides coverage for third-party claims of bodily injury, property damage, or personal injury arising from your business operations. As a tax preparer, you’ll likely want to obtain general liability insurance to cover potential lawsuits or claims related to professional negligence, errors, or omissions.
Professional liability insurance for tax preparers is only one of the many considerations for starting your own tax prep business. To access more resources for professional tax preparers, including how to market your business and how to select the right tax software, visit our online resource center.
