What is Tax Preparers Professional Liability Insurance?
Tax preparers play a pivotal role in helping individuals and businesses complete their tax returns. After all, a tax preparer can make all the difference between paying more money to Uncle Sam and getting a refund.
As a result, tax preparers have a busy workload, especially during tax season when they work long hours to meet deadlines and spend more time with their computer than with friends and family. And as any tax preparer knows, that hectic pace can inadvertently lead to missteps and mistakes.
Even the most experienced tax preparer can accidentally miss a deadline or perform a miscalculation. Knowing mistakes can and do happen is why tax preparers need to have insurance in order to be protected when there is an accidental error or mishap.
Below, we’ll cover what tax preparers need to know about tax preparers professional liability insurance for their business, including how insurance can protect tax preparers, how to get it, and how much it will cost.
What Insurance Policies Do Tax Preparers Need?
A robust E&O policy should address any issues concerning your performance providing professional services as a tax preparer, including breach of duty and contact, misleading information, miscommunication, bad advice, and perceived negligence. Some E&O policies will also provide protection for unintentional copyright infringement.
Mistakes happen, and tax preparers professional liability insurance can protect you against litigation resulting from unintentional errors and mishaps. And if a mistake results in a client suing you for financial damages, professional liability coverage will protect you so that you’re not on the hook for the costs. Tax preparers professional liability insurance will cover your defense costs as well as any potential settlements. That means that an accidental error doesn’t have to derail the business you’ve worked so hard to build.
If you don’t have tax preparers professional liability insurance when a claim for a perceived error comes in, you will be liable for any legal fees and settlement costs.
It’s worth noting that professional liability insurance covers financial damages and does not offer protection for bodily injuries or property damages, which a general liability policy would cover.
Other Insurance Policies for Tax Preparers
While tax preparers professional liability insurance is a must-have, there are other types of insurance worth considering to ensure you have comprehensive protection.
Business Owners Policy
A business owners policy combines general liability, commercial property, and business interruption insurance into one affordable and convenient package.
General liability insurance provides coverage for bodily injuries at your place of work or damages to another property. It will also cover claims of libel, slander, and violating another individual’s privacy rights.
Commercial property insurance will cover losses if any equipment or furniture is stolen or damaged at your place of business. Commercial property insurance will also kick in to cover expenses if your property is vandalized or damaged by severe weather.
Finally, business interruption insurance will come into play to cover lost income if your business is forced to shut down for a period of time. Typically, a business interruption policy will cover lost income for up to one year, so long as the reason you must shut down operations is covered by the policy.
Cyber Liability Insurance
Working digitally is imperative in today’s business world, which is why cyber liability insurance is no longer a niche policy for select industries. Since tax preparers interact with clients digitally and store loads of sensitive information, it’s no surprise that they are often targeted by cybercriminals, making this another crucial policy to have.
In the event of a cyber incident — such as a data breach, ransomware attack, phishing, or other cybercrime — cyber liability insurance will cover first and third-party losses. In addition to covering financial damages, a cyber liability insurance policy will also handle investigating the incident, notifying those affected, credit monitoring for victims, and PR services if your business experiences reputational damage.
Commercial Crime Insurance
No one likes to think their trusted and valued employees could ever steal from them. But it happens more often than you likely think. In fact, 75% of workers admit to stealing at least once from their employer.
Commercial crime insurance can protect your business from losses caused by both third parties and internal employees. It covers losses caused by petty theft, forgery, fraud, burglary, and more.
If you run your own tax preparation business and have employees, you’ll need to have this coverage. And we’re not just saying that for kicks — workers compensation is mandatory in every state except for Texas.
If an employee were to trip on the stairs at the office and break their ankle, workers compensation insurance would cover the costs for the care and compensation of the injured employee.
Workers compensation is important for employees and employers alike, and covers medical expenses, rehabilitation, lost wages, and death benefits.
Why Do Tax Preparers Need Insurance?
Wondering how tax preparers insurance can benefit you and your business? Here’s a look at a few common scenarios:
Professional Service Mistake
A company that generates revenue from an online shop and retail locations comes to you for help filing taxes. You receive all the necessary information from them and get to work. You complete the company’s taxes on time and are thorough with everything that is submitted. However, it is later revealed that an unintentional error was made on the tax filing, and the business now owes the IRS several thousands of dollars. As a result, the company sues you for the damages.
Mistakes can happen to anyone — even professional tax preparers. Unfortunately, when a tax preparer makes a mistake, it can lead to costly repercussions for their clients. And that can mean expensive legal costs and settlements for your business. With tax preparers professional liability insurance, if you make an unintentional error, omission, or mistake, your legal fees and any potential settlements are covered so that your business isn’t jeopardized by an accidental oversight.
Your business employs a few team members who work with clients. One of your employees provided tax advice to a client related to the client’s growing business. Despite the employee’s best intentions, the client ends up having to pay significantly more in taxes after following the advice. Angered by the result, the client sues your business to cover the damages.
Professional negligence is a serious issue for tax preparers. Even the best of the intentions can be costly if the outcome isn’t favorable for clients. If a client believes the advice they received from your business caused them financial hardship, they could sue you for professional negligence. However, tax preparers professional liability insurance will cover your business for the majority of costs associated with the claim.
Failure to Deliver
A client you have been working with for several years asks that you file an extension request on their behalf since they would be out of the country and unable to provide you with their tax information before the filing deadline. You promise to send the extension in. After the client’s taxes are filed, it’s discovered that you never submitted the extension. The error results in the IRS assessing penalties and interest against your client, amounting to a hefty expense. The client decides to take you to court to recoup the damages.
Tax preparers are deadline-oriented individuals. Those deadlines are crucial for delivering professional services to your clients. But that doesn’t mean a deadline can’t accidentally slip by. A client may file a lawsuit against you for failing to deliver on your promised services. In that case, tax preparers professional liability insurance would kick in to respond and financially protect your business.
As a tax preparer, you’re constantly collecting and storing sensitive information. Though you’ve taken proactive measures to secure the data, your system ends up being breached by cybercriminals. As a result, a hacker makes off with confidential information from your clients and holds it for ransom.
Any cyber incident is troubling. Fortunately, with a cyber liability policy, your insurance provider will take care of investigating the incident, notifying the affected clients, credit monitoring services for victims, and covering legal fees if any clients sue you because of the cyber attack. Plus, many cyber liability policies will even cover the cost of a ransom to settle the matter.
Slips and Falls
A client comes to your office for a consultation. On their way out, they slip outside on an icy stair, fall, and require medical attention for a broken wrist. The injury results in the client being unable to work, so they sue your business for damages.
With commercial general liability insurance included as part of a business owners policy, your tax preparation business is covered for the legal costs, associated medical fees, and any settlements regarding this lawsuit, and any other claims of bodily injury or property damage related to your business.
How Much Does Insurance For Tax Preparers Cost?
Since no two businesses are exactly alike, it’s difficult to accurately project how much insurance for tax preparers will cost without completing a quote.
For professional liability insurance, a small business can, on average, expect to pay around $500 to $1,500 per year.
But it’s important to stress that this is only a rough estimate for tax preparers professional liability coverage. Various conditions can affect an individual business’ insurance premiums, such as location, claims history, and size.
The factors that typically influence premiums when applying for tax preparers professional liability insurance include:
The location of your business will affect your insurance premiums. For example, many states have minimum coverage requirements in place for specific industries, which can increase premiums. And tax preparers based in major urban centers like New York City or Los Angeles will typically pay more than those in less populated areas.
The size of a business is directly connected to insurance premiums. A tax preparer operating as a sole proprietor will pay substantially less than a business with 15 employees.
When determining the cost of your tax preparers insurance, you can expect insurers to ask about your recent revenue, most likely for the past three years. An unfortunate reality is that the more successful a business becomes, the more lawsuits it will attract. So, the higher your revenue is, the higher your premiums will be.
Landing a large company as a client is a massive win for your tax preparation business, but it can come with the caveat of impacting your insurance premiums. Tax preparers who only work with small businesses and sole proprietors will pay less than those with large corporations as clients.
Your business claims history will significantly impact how much you’ll pay for insurance. When applying for coverage, insurers will require that you disclose any previous claims or other disputes. Businesses with a long history of costly claims can expect to pay more for insurance.
It’s important to be truthful when providing this information since any later revealed discrepancies can end up nullifying your insurance coverage.
Simply put, the higher your coverage limits, the more your premiums will be. Discuss your needs with your insurance broker to ensure that you have the right amount of coverage without unnecessarily overpaying.
How Do You Get Tax Preparers Professional Liability Insurance?
Searching for insurance coverage can seem daunting, but the good news is that any reputable carrier can offer insurance —particularly professional liability coverage — for tax preparers.
If you want to switch insurance providers, start by requesting a loss run report from your current insurer. Think of a loss run report as being the insurance world’s version of a credit score. If you have a clean slate regarding previous claims, a loss run report can help provide the evidence you need to negotiate lower premiums. Best of all, getting a loss run report is easy; all you have to do is contact your current insurer and request one.
It’s also a good idea to gather your business information early to have it ready when getting quotes from insurers. Put together a document that contains the following:
- Your registered business information
- Number of employees and any third-party connections
- Revenue for the last three years
- The services you offer and types of clients you work with
- Details of any physical properties your business uses, including leasing agreements, building size, and security features
Once you have all your business information together, you’re ready to get the ball rolling on getting quotes. It’s worth starting your search with insurance providers that offer tailored policies. Customized insurance coverage will ensure your tax preparation business has the most comprehensive coverage to meet its needs.
For example, at Embroker, you can tailor policies to your business’ unique requirements by choosing your own limit and deductible.
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