Professional Liability Insurance for Tax Preparers
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Professional Liability Insurance
for Tax Preparers

As a tax preparer, your clients are counting on you to ensure they keep every penny they're entitled to. It's a responsibility you don't take lightly, and you always do your best work on behalf of your clients. But sometimes, mistakes can still happen. And it only takes one critical error to make a dissatisfied client file suit against you. If that happens, things can get very expensive, very quickly.

To protect your business and everything you have invested in it, you need professional liability insurance. Also called "E&O" or "errors and omissions" coverage, this type of insurance covers you if one of your clients claims that an error or omission in your work caused them a financial loss.

If, for example, you're buried in tax returns and forget to file a client's return on time, the client could decide to sue you for damages. Or, if an IRS audit turns up mistakes in a client's return that are due to a technical error on your part, you could very easily be sued. Even if you don't believe your client's problems are your responsibility, you will still have to spend time and money fighting for your defense.

Within policy limits, professional liability insurance pays for a legal defense, your time spent in court instead of working, and other costs specified by your policy. If you're legally obligated to compensate your client for the loss or other damages, your E&O insurance will pay that award as well, according to the provisions in your policy.

What You Need to Know

E&O insurance policies are typically issued in increments of $1 million and have per-claim deductibles ranging from $1,000 to $25,000. These types of policies are issued on a "claims-made" basis, meaning that coverage must be in force both at the time of the alleged incident and at the time the claim is made, so it's wise to keep your policy in force even after you've completed an engagement with a client.

Because your client may require that you carry professional liability coverage, read the fine print in your contract to be sure you have the amount specified.

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Professional Liability Insurance Tips

  • In general, professional liability insurance is issued on a "claims-made" basis, which means that for an error or omission to be covered, it must have taken place while the policy was in force and you must also file the claim while the policy is still in force. So to ensure coverage, you must keep your policy active long after your work is done.
  • For situations that aren't covered by your professional liability insurance policy, it's a good idea to have a contract to explain your rights, your client's rights, and the resolution procedures that will be used if there are any disputes over the course of your business relationship.
  • Even if you do your best work and use the latest software, mistakes and omissions do happen. Because the risk is always there, professional liability insurance is a must for tax preparation professionals.