Why Tax Preparers Need Professional Liability Insurance
Taxes and money are a volatile combination in current litigious times. If a mistake is made on client tax returns and a business loses money, tax professionals will be at a high risk of getting sued. Tax preparation is a highly regulated industry that runs on strict deadlines. Failure to adhere to key regulatory codes or missing a filing date can create an exposure resulting in litigation or disciplinary/regulatory proceedings. Fortunately, one can avoid such risks by safeguarding themselves as individuals and their business with professional liability insurance.
Beware the Risks
Preparing taxes is perilous, regardless of expertise in tax preparation or accounting. Common everyday risks include missing allowable deductions, failure to document individuals claimed, or accidental errors or omissions related to client information. Many different circumstances could lead a tax professional to miss a tax-saving opportunity buried within current tax laws or regulations. Whatever the mistake or act of negligence, financially harming a client almost always has consequences.
If mistakes result in underpayment of taxes, clients will become liable for interest and penalties. Past and present clients are capable of filing a claim against preparers to recover such losses.
Professional Liability Insurance
Professional liability insurance mitigates the risks of preparing tax returns and maintaining company records and books. Also known as errors and omissions or malpractice insurance, professional liability insurance covers the expenses of defending oneself against accusations of professional negligence. Coverage provides for the cost to hire an attorney and pay any legal defense fees as well as settlements or financial judgments ruled against the insured. Even the most seasoned tax professionals can make mistakes. A client can bring forth a lawsuit for any reason, especially if they perceive that wrongdoing or negligence has taken place.
Purchasing a professional liability policy is a means of risk transfer. When an insured professional pays their premium, they have decided to outsource their professional risks by entering an agreement with their insurance company which provides:
- A claims adjuster and a defense attorney at no out of pocket expense
- Costs for expert witness (es) to strengthen legal defense
- Coverage for arbitration, mediation, or other forms of alternative dispute resolution
- Payment for court administrative expenses
- Coverage for disciplinary or regulatory proceedings
- Assistance in the event in the insured received subpoenas for documents or testimony
- Expense benefits for costs incurred resulting from trial or arbitration attendance
- Employee theft coverage
Notably, the aforementioned costs resulting from client accusations and legal expense can add up fairly quickly. Obtaining professional liability coverage is a simple way to gain peace of mind. Certain services fall outside of a tax preparer’s professional liability insurance policy and remain uncovered. Common exclusions include:
- Providing services for publicly held companies related to audit engagements
- Business valuation services
- Forecast and projection services
- Limited partnership or tax shelter syndication services
- Merger and acquisition services
- Securities services
- Trustee services
Additionally covered areas of practice include but are not limited to:
- Bookkeeping, write-ups, and payrolls
- Tax work
- General business planning
- Reviews, compilations, and audits work for private companies and individuals (no greater than 25% of total services)
- Personal financial planning or investment advisory services (no greater than 25% of total services)
Why Buy Tax Preparers Professional Liability Insurance
It is important to purchase a professional liability coverage specifically tailored to your professional needs and with your interests in mind. Coverage provides peace of mind in a few ways:
- Reduces financial uncertainty. It replaces a large, unknown risk (the chance of getting sued) with a smaller, known expense (insurance premium). Most tax preparers understand this importance when it comes to business finances.
- Provides easy and quick access to a proven defense attorney. If a lawsuit is brought against an insured, acting swiftly is necessary. Professional liability insurance takes care of attorney assignment and other legal logistics.
- Reduces stress. Facing a lawsuit can be an incredibly stressful and time-consuming experience. First, it raises the possibility of liability for a large settlement or judgment. Without an insurance policy, an individual creates a massive exposure to their livelihood by accepting their everyday professional risks. Litigation against an insured can also raise questions about professional competence, which may become public. Professional liability insurance pays for an attorney in an effort to have the claim(s) dismissed or even settled outside of court. A lifeline of support for both the financial and emotional strain of being sued can go a long way.
- Fills in insurance gaps general liability or other business insurance fails to address. Many tax preparers believe their general liability insurance or business owner’s policy (BOP) covers professional mistakes or negligence. In most cases, they only cover third-party injuries and property damage, not mistakes made during the rendering of professional services.
What to Look for in a Professional Liability Insurer
Given the importance of protecting a business against client lawsuits, it’s crucial to pick an insurer with industry expertise. Here are some things 360 Coverage Pros can guarantee outside of a great price:
- Experience with tax preparation business and comprehensive coverage options, broad coverage for individuals, business name, employees, independent contractors, and additional insureds
- An established track record of financial strength
- A strong reputation spanning multiple industries
- Best-in-class client service
- Top ratings from organizations like A.M. Best and Standard & Poor’s
- Ability to provide legal advice at the first sign of trouble (via a legal hotline)
- Risk management content to help you prevent claims
360 Coverage Pros offers a professional liability insurance program that checks all of the above boxes. Our new program for tax preparers (accountants, CPAs, non-CPAs, enrolled agents, annual season filing participants, and PTIN holder) features a segment-leading online application that lets you click and bind your coverage to receive instant proof of insurance. To learn more, visit our website.