Why Do Tax Preparers Need Insurance?

As a tax preparer, you’re trusted with one of your clients’ most sensitive tasks: keeping them on the right side of the Internal Revenue Service. It’s a big job — even little mistakes can have an outsized impact. And despite your commitment to producing excellent work for your clients, oversights can still occur. That’s what makes liability insurance a worthwhile investment in your tax preparation business.

Getting the right insurance coverage isn’t nearly as complicated as the tax code itself, but it’s just as essential. Whether you’re filing returns from your home office or managing a team of preparers during peak season, having proper protection lets you focus on serving your clients effectively and not worrying that a big mistake could lead to colossal stress or financial repercussions.

In this article, we’ll break down why you need insurance, what types of insurance you need, and when to get covered. This way you can make smart decisions about safeguarding your tax preparer business.

What Insurance Is Needed for Tax Preparers?

Errors and omissions (E&O) insurance, also known as professional liability insurance, is an important coverage a tax preparer can have. This type of liability insurance protects professionals when clients claim that mistakes, oversights, or negligence in a tax preparer’s work caused them financial harm – even if they are mistaken.

When you’re dealing with federal and state tax laws, even a small error or oversight can trigger big problems. If you accidentally claim the wrong deductions, mishandle a client’s earned income credit, or miss a crucial filing deadline that results in penalties, E&O insurance helps cover legal fees and potential settlements if a client sues.

E&O insurance covers both defense costs and potential settlements if a client files a claim. This includes attorneys’ fees, court costs, and settlement amounts — even in cases where the claim is unfounded. The costs of defending against even a minor claim can be substantial and create a distraction from running your business.

Why Does a Tax Preparer Need E&O Insurance?

Tax preparation is complex, even for seasoned pros. Changes in tax laws and IRS interpretative rules, clients’ varying abilities to provide accurate figures, and rapid-fire deadlines all make this job a challenging one. Professional tax preparers must stay current with changing regulations while managing multiple client deadlines and ensuring compliance across various tax situations.

E&O insurance helps protect your practice when specific filing issues arise, such as missed deadlines, incorrect Social Security numbers that delay returns, or earned income credit miscalculations. The coverage handles both defense costs and potential settlements if a client files a claim, allowing you to maintain your focus on serving clients effectively while having professional protection in place.

What Other Types of Insurance Does a Tax Preparer Need?

While E&O insurance is your main form of protection, it’s not the only coverage you should consider. Here’s what else can help protect your tax preparation business:

General liability insurance

Your work might revolve around tax forms and software, but your business likely still involves face-to-face interactions. General liability insurance (GL) steps in to cover costs associated with third-party injuries or damages (such as a client or visitor). It would cover legal fees, medical expenses, and settlements or judgments resulting from covered claims. These are the liabilities GL can cover:

Bodily injury coverage

Covers you when a client is injured at your office, for instance, by slipping and falling on a wet floor during an in-person visit.

Property damage coverage

Protects you if you accidentally damage a client’s property while working, for instance, by spilling a drink on their laptop during a consultation.

Reputational injury coverage

Helps if you’re accused of damaging someone’s reputation through libel or slander. For instance, if you publicly suggest a competing tax prep firm routinely files late returns, they could sue you for damaging their reputation.

Advertising injury coverage

Covers claims related to your marketing activities, such as falsely advertising your range of services.

Workers’ comp insurance

Running a tax preparation business often means having help, especially during busy season. Whether you’ve got year-round employees or just seasonal reinforcements, workers’ compensation insurance is typically required by law. This essential protection covers medical bills and lost income if your team members get hurt on the job. Maybe someone takes a tumble while grabbing files from your storage room — workers’ comp has you covered.

Cyber insurance

Tax preparers are prime targets for cybercrime. You’ve got a treasure trove of sensitive data that criminals would love to access, and smaller tax offices may lack enterprise-level security. A successful ransomware attack during tax season could lock you out of crucial files when your clients need you most, or a data breach could expose their private information. Cyber insurance helps you recover from these disasters, covering everything from client notifications to system restoration costs.

When Would You Need Insurance as a Tax Preparer?

Many tax preparers choose to carry liability insurance when handling clients’ financial documents. This applies whether you’re working part-time during tax season or managing a year-round practice.

Businesses and high-value clients frequently look for tax preparers who carry professional insurance. It’s often a requirement in their vendor agreements and can be a distinguishing factor when clients are choosing a tax preparation service.

Can a Tax Preparer Be Held Liable?

Absolutely — and the IRS spells it all out. The IRS has established specific penalties for tax preparation infractions. For 2024 returns, these include:

• Taking an unreasonable position on a return: $1,000 or 50% of preparation fee (whichever is greater)
• Willful or reckless conduct: $5,000 or 75% of preparation fee (whichever is greater)
• Missing signature on return: $60 per incident (maximum $30,000 per year)
• Failure to provide PTIN: $60 per incident (maximum $30,000 per year)
• Failure to provide client copy of return: $60 per incident (maximum $30,000 per year)

Tax preparers face specific liability risks in their day-to-day work. Common situations that could lead to claims include:

• Missing critical filing deadlines that result in penalties
• Incorrectly calculating estimated tax payments
• Omitting required schedules from returns
• Failing to secure sensitive client data
• Making unauthorized changes to returns after client approval

While clients must verify their return information, tax preparers can still face claims related to their professional services. E&O insurance helps protect against these risks by covering legal defense costs and potential settlements, allowing you to focus on serving your clients effectively.

Are You a Tax Preparer in Need of E&O Insurance?

Professional liability insurance is a standard business tool for tax preparers, just like tax software or professional memberships. It’s a practical investment that helps protect your practice and your clients.

Ready to protect your practice? Berxi makes it easy to get the coverage you need, with policies designed specifically for tax professionals. Plus, buying direct from Berxi could save you on average up to 15%. Get a quote today.

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The views expressed in this article are those of the author and do not necessarily reflect those of Berxi™ or Berkshire Hathaway Specialty Insurance Company. This article (subject to change without notice) is for informational purposes only, and does not constitute professional advice. Click here to read our full disclaimer