Congratulations! You survived the 2021 tax season. Or did you? Are you prepared if clients or the IRS file a claim against you in the months ahead?
You made it through the 2021 tax season and are now breathing a sigh of relief. But, you may not want to relax quite yet. The IRS’s well-documented backlog means you might not hear about filing issues for a year or more. Plus, as soon as one tax year wraps up, the next one quickly begins. With that comes complex client tax situations that leave no margin for error.
There is never a good time to let down your guard when it comes to protecting your tax-preparation business. Said another way, it’s always a good time for preparers to evaluate their legal risk exposures and mitigate them with professional liability insurance.
Dangerous Risks
Preparing tax returns is a risky business. Even if you have a lot of experience in tax preparation or accounting, the federal tax code is so complex it’s easy for tax preparers to make mistakes. Overlooking allowable deductions, failing to support claimed deductions and submitting incorrect client information are common and potentially costly mistakes. Complicated matters tax preparers might overlook are opportunities to reduce clients’ tax liability or overstate the taxes they owe.
In short, hurting a customer financially will almost always have unintentional consequences. For instance, if tax-preparer mistakes result in tax underpayment, clients may now owe extra interest and penalties, and they often react by filing claims against their tax preparers to recover their losses.
The Role of Professional Liability Insurance
Professional liability insurance (PLI) reduces the risks of preparing tax returns and maintaining company books and records. Also referred to as errors and omissions (E&O) or malpractice insurance, professional liability insurance (PLI) covers tax preparer costs for defending themselves against charges of professional negligence. PLI handles the expenses of hiring a defense attorney and paying court-imposed settlements or judgments.
Many tax professionals believe they’re immune from litigation because they run their business by the book; however, clients can bring forth a lawsuit for any reason— valid or illegitimate. Responding to unfounded or frivolous lawsuits still requires hiring a defense attorney, which can be expensive. Paying attorney fees and related legal expenses is the purpose of having PLI coverage.
Here’s another way of viewing this form of insurance: It’s a form of risk transfer.
When insured tax preparers pay their premiums, they effectively outsource their professional risks to an insurance company. That entity provides:
- A claims adjuster and defense attorney at no cost to the tax preparer.
- Reimbursement for an expert witness or witnesses to strengthen the preparer’s legal defense.
- Funds to pay for arbitration, mediation or other forms of alternative dispute resolution.
- Payment for court administrative expenses.
- Coverage for disciplinary or regulatory proceedings.
- Assistance in responding to subpoenas for documents or testimony.
- Expense benefits for costs incurred due to attending a trial or arbitration proceeding.
- Employee theft coverage.
Professional Activities Covered
Tax preparer PLI is designed to cover the main professional activities in which tax preparers engage. These include, but aren’t limited to:
- Bookkeeping, write-ups and payrolls
- Tax work
- General business planning
- Reviews, compilations and audit 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 Tax Preparers Need Professional Liability Insurance
Whether you’re in your busy season or preparing for your next one, you need professional liability insurance. Not having to pay out of pocket for the expenses mentioned earlier is one reason. But there are many other benefits to consider buying or maintaining PLI coverage. They include:
- Reducing financial doubt– By definition, PLI substitutes a large, unknown risk such as the chance of getting sued with a smaller known expense (an insurance premium). Most tax preparers understand and value this bedrock principle of business risk management.
- Getting convenient and quick access to a proven defense attorney– Getting sued demands an immediate response. With a PLI policy, tax preparers quickly receive legal counsel and help with process logistics.
- Lowering your personal stress level– Becoming a legal defendant can be emotionally devastating. It not only creates the potential of financial loss, it also can be highly damaging to a tax preparer’s professional reputation. A PLI policy becomes a lifeline of support that relieves the financial and emotional strain of getting sued.
- Filling the gaps in other types of insurance– Some tax preparers think their general liability insurance or business owner’s policy (BOP) covers professional mistakes or negligence. In most cases, these policies only cover third-party injuries and property damage, not professional errors and omissions.
The Bottom Line
As a professional tax preparer, working in a highly complex, government-regulated profession is risky. A small error could make you the target of consumer litigation, IRS enforcement or both. Having professional liability coverage means you won’t face these challenges alone. You’ll have the help of an insurance company, claims adjuster and attorney– all with deep experience responding to potentially damaging claims. And if you do wind up in court, your personal assets will be safeguarded. Shouldn’t you consider buying professional liability insurance— or upgrading your current policy— today?
In the market for tax preparer professional liability insurance? Check out the coverage available at 360 Coverage Pros, with premiums starting at $23.33 per month.
