Even the most experienced tax preparers can make mistakes. A missed deduction, data entry error, or misunderstanding of a tax rule can lead to client disputes, financial losses, and even legal claims. Depending on the circumstances, tax preparers may be held liable for errors on a client’s tax return, making professional liability insurance an important safeguard for many firms.
Also known as errors and omissions insurance (or E&O insurance), professional liability coverage can help protect your business from the financial impact of claims related to mistakes, oversights, or professional services you provide.
In this article, we’ll explain what professional liability insurance for tax preparers covers, how much E&O insurance typically costs, and whether additional protection, such as cyber liability, workers’ compensation, or general liability, may be worth considering.
Are tax preparers liable for mistakes?
Tax preparers can be held liable for errors or mistakes on a client’s tax returns, particularly if those errors result from negligence, inaccurate advice, or a failure to exercise reasonable care when preparing a return.
Tax preparers may also face claims related to tax planning recommendations, filing guidance, or other professional advice provided to clients. In some cases, these issues can lead to financial losses for clients, regulatory penalties, reputational harm, and even loss of professional licenses and certifications.
What is professional liability insurance (E&O) insurance for tax preparers?
Professional liability insurance, also called errors and omissions (E&O) insurance, protects you and your business if you’re sued for professional error or negligence. E&O insurance typically covers your legal fees and anything you must pay to the plaintiff. Most E&O policies are claims-made, meaning coverage applies only if the claim is filed while the policy is active, not necessarily when the error occurred. You should always check the retroactive date on your policy to determine how far back the coverage applies.
For tax preparers, this means you’re protected if a client sues for damages due to your mistakes.
What does E&O Insurance cover 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, settlements, or judgments tied to mistakes such as:
- Incorrect tax calculations — for example, miscalculating a client’s total tax liability, resulting in underpayment penalties or an unexpected tax bill.
- Missed deductions — such as overlooking eligible business expenses or credits, causing the client to overpay and seek reimbursement.
- Failure to file returns on time — for instance, missing a filing deadline that leads to IRS penalties and interest charges for the client.
By covering these types of risks, E&O insurance helps protect not only a tax preparer’s finances but also professional reputation.
What does E&O Insurance not cover?
While E&O insurance does provide valuable protection to tax preparers, it is important to understand the limits of its coverage. The coverage is meant to protect you from unintentional errors and omissions. However, it does not cover every type of risk that your business may face. Here are some common scenarios that are excluded from E&O coverage:
- Intentional or fraudulent acts: E&O insurance will not cover claims resulting from deliberate wrongdoing like fraud misrepresentation or knowingly submitting false information on a tax return.
- Criminal activity: Any claims arising from illegal conduct including theft, embezzlement, or other criminal acts will also be excluded from coverage.
- Employment-related issues: Claims involving workplace disputes, such as wrongful termination, discrimination, harassment, or retaliation, are not covered under E&O insurance. These situations typically require Employment Practices Liability Insurance (EPLI).
- General business risks: E&O policies do not cover property damage, bodily injury, or general liability issues. For this coverage, you will need general liability insurance in addition to E&O insurance.
- Pre-policy incidents: E&O insurance is typically a claims-made policy, meaning it won’t cover mistakes you made before your coverage started, unless you’ve arranged for prior acts of coverage or a retroactive date for policy coverage.
- Specialized services: If you offer specialized services outside of tax preparation like financial advising or legal consulting, those may not be covered unless specifically included in your policy.
- Cybercrime and data breaches: Most E&O policies exclude cyber liability like data breaches or ransomware attacks. To protect against these risks consider adding cyber liability insurance.
When do tax preparers need tax preparer’s liability insurance?
Federal law does not require tax preparers to carry liability insurance. Whether professional liability insurance for tax preparers is required depends on your state, professional credentials, and business relationships. In many cases, tax preparers are not legally required to carry errors and omissions (E&O) insurance. However, licensing boards, professional organizations, employers, or contractual agreements may require coverage or proof of insurance.
Even when it isn’t legally required, some clients, accounting firms, and business partners may require tax preparers to carry E&O insurance before entering into an engagement. Larger organizations are especially likely to request proof of coverage as part of their risk management policies. 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 may face claims if a client experiences financial losses due to an error, omission, or inaccurate tax advice. For example, if a mistake on a return results in an IRS audit, penalties, interest, or other financial consequences, a client may seek compensation for those damages.
How much does E&O insurance cost for preparers?
Small businesses pay an average of $30 to $100 per month for errors and omissions insurance, depending on the size and scope of their services. Solo preparers can typically secure basic coverage at a relatively affordable rate, while larger or higher risk firms may pay significantly more.
Keep in mind, this is only an 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.
How to estimate the right amount of coverage
If you’re unsure how much E&O insurance to carry, asking a few key questions can help guide your decision:
- Do you work on your own or hire employees or contractors?
- How many clients do you handle each tax season?
- What types of clients do you serve (individuals, small businesses, or larger companies)?
- Do you provide additional services like bookkeeping, payroll, or tax advisory?
- What’s the potential financial impact if you make an error on a client’s return?
Answering these questions can help you better assess your risk level and choose coverage limits that align with your business needs.
If you are tax preparer working 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.
What other types of insurance do I need as a tax preparer?
While Errors and Omissions Insurance is the most vital coverage for tax preparers, it may not be enough on its own, especially if you operate from a physical office or manage client data. Depending on your business setup, you may need additional policies to fully protect again risks like property damage, data breaches, or staff injuries.
Whether you work from a home office or a commercial space, the right combination of insurance policies can help safeguard your business from unexpected events. Below are key types of coverage to consider:
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 working seasonally or year-round, workers’ compensation will help protect your tax business from financial losses and legal liabilities arising from workplace injuries or illnesses. It’s also required by 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 and advertising injury that could arise from your business operations. As a tax preparer, this coverage is especially important if you see clients in person, as it can cover medical expenses or legal fees if someone is injured on your premises. It also protects against reputational harm, such as claims of libel, slander, or false advertising. 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.
