Tax preparers play a crucial role in helping clients navigate the complexities of tax returns and related financial matters. Even with the most professional of preparers and a high level of care in your work, mistakes are often inevitable components of tax preparation. Because of this, it’s important to know your options before an oversight in your practice arises. One of the best protections you can secure for your business is Errors and Omissions (E&O) Professional Liability insurance. In this blog post, we will walk you through what E&O insurance is, the importance of this measure for your tax preparation services, and how tax preparers can obtain this coverage. 

What is Errors and Omissions Insurance? What Does E&O Cover? 

Errors & Omissions insurance is a specialized type of coverage that protects tax preparers against liability arising from errors or negligence in their tax services. Unlike traditional liability insurance, E&O safeguards against financial losses that can occur in lawsuits, legal costs, and settlements related to professional errors. In receiving this additional measure of financial protection, tax professionals can operate with a sense of reassurance that they can also pass along to their clients. 

Benefits of E&O Coverage: 

• Financial Protection 

No matter how unexpected a mistake as a tax professional may be, these types of faults can lead to expensive consequences. Errors & Omissions insurance protects from financial burdens such as legal fees, court charges, and any additional damages associated with claims made against a tax preparer for errors incurred in their professional services. 

• Client Confidence 

From your clients’ perspective, possessing E&O insurance showcases your commitment to accountability and professionalism in your role as their tax preparer. Your clients can entrust their tax returns and other financial information to you, since they have an assurance that you are prepared to rectify any potential faults that may occur as you provide services. 

• Regulatory Compliance 

Some industry jurisdictions or associations require tax professionals to obtain E&O insurance in order to maintain their licensure or professional membership. Tax preparers can comply with these requirements by acquiring Errors & Omissions insurance.   

Areas of Coverage: 

• Errors & Negligence 

Primarily, E&O protects tax professionals in instances where errors or omissions are made during the process of tax preparation. These mistakes can occur occasionally, including but not limited to miscalculations or misunderstandings of certain tax regulations. E&O insurance helps relieve the financial load of any costs that are associated with correcting these errors, such as filing amended tax returns, paying penalty charges, or addressing legal claims. 

• Client Claims 

Errors & Omissions insurance also extends its coverage to protect tax preparers against claims of negligence or misconduct. For example, if a client were to allege financial losses or legal repercussions following advice they received from their tax preparer, E&O insurance can help pay for any legal costs on behalf of the tax professional if they are found liable.  Most Professional Liability policies will defend a policyholder if wrongly or fraudulently accused of making an error. 

• Legal Resources 

Likewise, E&O customarily includes coverage for the costs of legal representation in cases where audits or investigations by tax authorities take place. It’s possible for a tax preparer to be subject to scrutiny regarding a client’s returns or advisory services; in these instances, Errors & Omissions insurance guarantees that the tax preparer can access legal resources to navigate this process effectually. Tax professionals can demonstrate their dedication to offering the utmost quality services by investing in E&O insurance, as it provides clients with peace of mind knowing they are protected from any unpredicted circumstances. 

What Does E&O Insurance Not Cover? 

As helpful as the coverage from E&O insurance can be, there are limitations to the areas of coverage that it offers. Depending on the policy and insurance provider, we’ve listed some potential areas of non-coverage for Errors and Omissions insurance for tax preparers. 

• Intentional Negligence & Fraudulence 

First, Errors and Omissions insurance does not cover deliberate or fraudulent instances of error by a tax professional. If a preparer intentionally engages in misrepresentation of income or claims false deductions, the policy will not cover any financial consequences.  

• Illegal Affairs 

Additionally, E&O insurance generally does not include coverage for any claims associated with criminal or illegal activity. If a tax preparer’s services violate tax laws, the resulting liabilities or expenses may not be protected by the insurance policy. Professionals must remain in compliance with any applicable regulations for coverage to be in effect. 

• General Liabilities 

Likewise, Errors and Omissions insurance often does not safeguard against claims that arise from non-professional services or general business risks. In other words, circumstances such as health accidents, property damage, or employment disputes are excluded from the scope of E&O. These types of issues may be best addressed with typical liability or property insurance. 

• Policy Limitations 

While E&O does generally cover future claims or incidents within the policy period, any occurrences from before the policy’s effective date are not included in insurance coverage. Any pending claims or preexisting concerns would be considered outside the range of the policy to ensure protection. Most E&O polices are Claims Made, so when the claim happens determines if the policy in force will pay. BUT there is a key to make sure you keep coverage for any past issues in force. All E&O policies should come with a retroactive date. The retroactive date is the date coverage is established. Once a policy goes in force, from that day forward as long as you keep coverage in force without a break in coverage (so it cannot terminate for any reason) your coverage will extend back to the retroactive date. The KEY is not to let your active policy terminate. You can move to a different carrier in this process, you just need to make sure the agent transfers the retroactive date to the new policy and there is no break in coverage. Once last caveat, you need to maintain the same policy limits or greater in order to be sure your retroactive coverage you had previously can pay the same amounts you carried previously. 

• Specialized Services 

Lastly, many tax preparers offer related financial services to better serve a range of clients, such as investment planning or financial guidance. Depending on the policy, these services may not be included in the extent of E&O coverage but may require a different type of insurance policy. Most accounting E&O forms will cover traditional accounting activities such as bookkeeping, taxes and payroll. If you provide other CPA functions, then use an accounting form that is geared to service CPA type scope of work. If you do other services outside CPA and or traditional accounting, then make sure to identify those elements on the insurance application. That is your way of protecting your work, and only you know these details. This allows your carrier the ability to review your specific operation and determine if their policy will cover your specific operation. Most insurance agents will not know the detail or extent of your services, so the best protect yourself go in sharing as much as you can. More information provides you with the best protection. 

• Cybercrime and Data Breaches 

The damaging effects of cybercrime and data breaches are a very real risk and as such, normally covered by a separate policy.  

Overall, E&O insurance provides essential protection for tax preparers; at the same time, there are some limitations and exclusions that tax professionals should be aware of prior to selecting a policy. Extenuating circumstances such as fraudulent activity, criminal acts, general workplace liabilities, and additional services are generally not covered by Errors and Omissions insurance. 

Please note that the specific terms and conditions of E&O insurance may vary depending on the policy and provider. We advise careful review of any policy and consultation with an insurance professional to fully grasp the scope of coverage and any potential exclusions. 

How to Obtain Errors and Omissions Insurance 

1. Assess Your Needs 

Consider the size and nature of your services as a tax preparer in order to determine what level of coverage would be appropriate for your needs. It may be helpful to examine the number of clients you serve, the complexity of the returns you prepare, and any potential risks involved.  

1. Research Providers 

In your research, seek insurance providers that are reputable in professional liability or E&O insurance specifically for tax preparers. If you have other connections in the industry through networking or professional associations, you might pursue recommendations to identify policy providers that are well-known and trusted in your field. Understand the difference between buying a policy direct from a carrier and using an agent. When you buy from a carrier you work wither their agent, and that agent is paid by the carrier. Your agent works for you, the carrier agent works for the carrier. That can come into play should you need help in any disputes. 

1. Obtain Quotes 

Once you solidify several promising providers, request pricing quotes that are tailored to your specific needs. Depending on coverage limits, terms, deductibles, and any premium costs, there are several associated factors to help you make an informed decision. 

1. Review Terms 

Carefully assess the terms and conditions of each E&O policy. You may want to specifically recognize any limits, exclusions, or endorsements that help you personalize the policy to your needs. 

1. Purchase a Policy 

Finally, after selecting the policy that is most compatible with your needs, complete an application and make any needed payments to secure your E&O coverage. Make sure you receive a certificate of insurance to confirm your policy. 

Upon acquiring Errors and Omissions insurance, tax preparers should facilitate consistent communication with their insurer. Additionally, any potential claims or incidents should be promptly reported to the insurance provider.  

Tax preparers can easily procure E&O insurance by assessing their needs, researching reputable providers, garnering pricing information, reviewing any policy terms, and purchasing coverage by completing an application. In taking these steps, tax professionals can more confidently move forward with insurance coverage knowing they are protecting their business and professional reputation against liability.  

Errors and Omissions insurance is a profitable defense for tax preparers, assisting in providing financial protection, reassurance to clients, and compliance with regulations. By considering the importance of insurance coverage for your tax preparation services and following the steps outlined above, tax professionals can promote a sense of reassurance within their constituents and offer the protection that is necessary to provide services with confidence. 

A big thank you to our friend Steve Ferguson from the Business Insurance arm of Tax Protection Plus for contributing to this article! 

Disclaimer: This blog post was curated to provide information to tax preparers and should not be considered legal advice. Consult with an insurance professional to take next steps and receive guidance regarding your circumstances.