Is your tax preparation business prepared to face a lawsuit? Even though you strive for accuracy on each and every return, mistakes can and do slip through. Having the proper liability insurance in place protects you from significant financial loss.
Here’s what you should know:
What is Professional Liability Insurance?
Professional liability insurance, also called errors and omissions insurance, protects you and your business if you’re ever sued for professional error or negligence. Typically E&O insurance covers your legal fees and anything you’re required to pay to the plaintiff.
For tax preparers, this means you’re protected if a client sues for damages due to your mistakes.
When would I 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 are to require proof of E&O insurance.
Even if none of your clients require it, it’s still wise to invest in a policy 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 ends up facing 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, the median cost of professional liability insurance for tax preparers is less than $30 per month for a policy with a $500 deductible.
Of course, this is only a rough estimate. Your premium will ultimately depend on the size of your business and how much coverage you require. Working with larger clients means that your errors could be more costly, meaning you’d need more coverage than a tax preparer who works with smaller businesses and clients.
What other types of insurance do I need?
While errors and omissions insurance is the most vital, your practice may need other types of insurance to be fully protected.
Business Owners Policy (BOP) or Home Office Insurance
If you have a brick-and-mortar location, you’ll need a business owners policy with property and liability coverage. This policy covers your building and equipment and provides liability coverage 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 some type of 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 keep you from ever needing to use your errors and omissions insurance. If you are sued, however, proper insurance can make the experience far less stressful and far less expensive.
The information in this article is up to date through tax year 2021 (taxes filed in 2022).