Understanding the Need for Tax preparer Insurance
The first step in deciding what insurance coverage you need as a tax preparer is to consider the nature of your work, which involves the voluminous federal and state tax laws.
From the valuable advice they give their clients to handling essential financial information and documentation of tax computation, compilation, and filing, tax preparers are responsible for their clients’ taxation matters from beginning to end.
The market size of the tax preparation services sector in the US was $11.9 billion as of June 2022 according to IBISWorld.
The work of a tax preparer is detail-oriented and complex. The requisite quality to be delivered on time and at the agreed price is a case in point for the tax preparer to purchase professional liability insurance. Any failure to deliver the agreed tasks whether the issue is quality, cost, or timeliness could invite a lawsuit.
Business risks faced by tax preparers
Errors such as missing a filing deadline could lead to a substantial fine payable by the client, which would almost certainly result in a claim against the tax preparer's business. Tax preparers can also be targets for data breaches, typically involving leaked client details; these clients could then sue the tax preparer.
The effectiveness of a tax preparer is measured by how well they mitigate their clients' risks, thereby mitigating their liabilities. But when things go wrong, tax preparers must be prepared to protect themselves. Let us consider some of the threats tax preparers may face:
For example, if the tax preparer does not bifurcate capital gains and regular income, the wrong tax rates may be applied to income or revenue, resulting in losses for the client. The client could then file a claim against the tax preparer for the financial loss.
Substandard quality of reporting
Failure to classify and treat debt versus equity appropriately in clients' financial statements could land tax preparers in legal trouble
If the tax preparer does not utilize the proper tax credits, this could lead to the client having a financial loss and filing a lawsuit for their damages.
Inappropriate representation of partnership structures by the tax preparer could result in a case by a client.
Office furniture and equipment could get damaged in a fire or other covered peril.
A virus attack could compromise a tax preparer network, which contains client-specific financial information naturally inclined to risk exposures. Using public Wi-Fi networks or not using encryption on the business's devices could, for instance, cause a Man-In-the-Middle Attack (MITM), an eavesdropping threat. The attacker-code lodges itself between a two-party communication, thus hijacking client-host sessions, leading to various types of threats, manipulation, and blackmail.
Recommended insurance for tax preparers
Tax preparers need policies that protect their business from the day-to-day threats they encounter. These are the recommended insurance policies that tax preparers should consider investing in:
Professional liability or error and omissions insurance
Tax preparer errors and omissions insurance, also known as the professional liability policy, protects tax preparers against client complaints. The complaints could be allegations of negligence, mistakes, or omissions in services rendered. The following examples illustrate the circumstances under which the errors and omissions policy comes to the protection of the insured:
Professional misrepresentation: For example, a tax preparer does not appropriately treat successor liability in the books, causing the client monetary damage. The client can sue the tax preparer, whose professional liability insurer will defend the lawsuit and pay what is awarded.
Professional mistakes: A tax preparer overlooks the cancellation of indebtedness by a creditor, which results in the payment of more taxes. As a result, the client could file charges.
Breaches of contract: Suppose the tax preparer has missed a filing deadline or has not delivered something as promised. In that case, the client could sue them for the fines or penalties incurred.
General liability insurance
Liability insurance protects tax preparers from third-party liability claims. Damages include medical expenses, economic damage, pain, and suffering. General Liability will also pay for covered claims, defense costs, and legal fees.
The types of protection under general liability insurance are as follows:
Bodily injury: A client trips and falls on broken steps at the entrance to the tax preparer's office. Tax preparer liability insurance will respond to the claim by the injured party.
Property damage: An employee accidentally drops a client's laptop on the floor. General liability insurance will pay the client's property damage claim.
Advertising Injury: A tax preparer slanders a competitor. General liability can defend the tax preparer if a suit is filed.
Workers’ compensation insurance
Workers' Compensation usually includes coverage for Employers' Liability as well. While workers' compensation addresses on-the-job injuries of employees, employers' liability will provide legal defense for the employer if they are sued by an employee for negligence relating to the employee's injury. The workers' compensation policy pays medical costs and a percentage of lost wages incurred by the injured employee. There are additional benefits payable which vary by state if an employee dies because of an on-the-job injury.
For example, a bookkeeper is diagnosed with carpal tunnel syndrome and suffers from excruciating pain in his hand, wrist, and arm. It is a common occupational hazard associated with extensive computer keyboard usage.
The medical advice may be for the bookkeeper to rest for a few weeks and undergo physiotherapy, or surgery may be required. In this case, a workers' compensation policy can pay the statutory benefits for the proper medical procedures necessary for the employee to recover.
Tax preparers deal with sensitive financial information that can quickly get compromised during a cyberattack. Under such circumstances, a tax preparer may face a claim or a lawsuit from the client. A cyber insurance policy can cover damages if a data breach causes a financial loss to clients.
The absence of an intrusion detection system in a business website can aid unethical hackers in manipulating the programming. They can inject malicious code into the search box of vulnerable websites, which makes the server divulge crucial information. As a result, hackers can manipulate data by viewing, editing, and deleting database tables. The attackers can also acquire database administrator rights. That's why a mature validation process is needed. It can help to avoid a leak of user-supplied data.
Fidelity or business service bonds offer reimbursement to business owners for employee dishonesty. The coverage can also provide first-party and third-party coverage.
First-party fidelity bonds protect the business in the event of the following:
- An employee embezzles cash from the employer.
- An employee commits fraud.
- An employee forges a signature on a check and cashes it.
Third-party fidelity bonds protect the business against client claims of dishonest employees, such as the following cases:
- The tax preparer steals something from the client's home.
- Fraud is committed against the client.
- There is an alteration of a check payable to or from the client.
- The employee steals client information.
Third-party client fidelity bonds are often considered a requirement before a client signs a contract with a tax preparer.
To decide on the right insurance policies to protect a tax preparer, one must look at the following factors:
- Business revenue
- Number of people employed
- Experience and Education of staff
- Claims history
Tax preparers handle sensitive personal and financial information in their line of business. Consequently, they are at greater risk of facing situations such as cyberattacks and professional liability claims. Therefore, to ensure the longevity of their business, they should invest in tax preparer insurance and maintain coverage for claims resulting from errors, omissions, cyberattacks, and general liabilities.