For tax preparers, errors, and omissions (E&O) insurance, also known as professional liability insurance, is a vital risk management tool. As the new year approaches, it’s important for all tax professionals to understand their E&O insurance options and requirements for 2024.
Let’s begin our informative exploration of this important topic.
What is E&O Insurance for Tax Preparers?
E&O insurance, sometimes called malpractice insurance, provides coverage for tax preparers in the event they make a mistake while completing or filing a client’s taxes that result in financial loss, penalties, or legal issues for the client. It protects professionals from being held personally liable for damages or claims resulting from their work.
More specifically, E&O insurance for tax preparers covers:
Negligent Acts, Errors, and Omissions
This includes protection if a preparer makes a mistake like omitting income, taking an improper deduction, incorrectly calculating credits, or filing an incorrect tax form. Coverage kicks in if the error causes financial harm to the client.
Failure to Provide Correct or Competent Advice
If a preparer gives faulty tax advice that leads to penalties or an audit, E&O insurance would cover related defense costs and damages awarded.
Misrepresentation or Breach of Contract
Protection is provided if a preparer unintentionally misrepresents facts about services rendered or breaks a service agreement with a client.
Privacy Breaches and Cyber Liability
Many modern E&O policies extend coverage for data breaches, cyber-attacks, loss or theft of client information, and related notification expenses.
Having proper E&O insurance gives tax preparers peace of mind knowing they have financial protection if an innocent error or oversight harms a client. It’s an essential risk management tool for any professional tax practice.
E&O Insurance Requirements for Tax Preparers
Not all states require tax preparers to carry E&O insurance, but there are some notable regulatory requirements worth knowing:
IRS Regulations
While not a direct mandate, the IRS requires all tax pros who enroll to practice before them to maintain adequate E&O coverage as a condition of continued enrollment. Minimums are not specified.
Circular 230
This publication governs practice before the IRS states enrolled agents, enrolled retirement plan agents, and registered tax return preparers must exercise due diligence in preparing or assisting in returns. Insurance demonstrates diligence.
California/New York Mandates
Tax preparers must have a minimum of $100,000 per act E&O coverage to work commercially in California. New York requires $25,000 coverage for volunteers and $50,000 for paid preparers.
PTIN Requirement
To obtain a Preparer Tax Identification Number needed to sign returns from the IRS, tax pros agree to maintain sufficient E&O protection. No minimum specified.
While requirements vary, having at least $100,000 per claim and $250,000 aggregate annual E&O insurance through a reputable carrier meets or exceeds most rules and demonstrates best practices. Let’s look at common policy details.
Key Components of an E&O Insurance Policy
When evaluating E&O insurance options, it’s important to understand common policy elements and coverage inclusions:
Policy Limits
This indicates the maximum payout per claim and in total per year. Higher limits provide more protection against costly lawsuits or settlements.
Retroactive Date
Look for unlimited retroactive coverage applicable to work as far back as the tax pro began preparing returns. Some policies only cover new claims.
Professional Services Covered
Confirm the policy clearly includes tax preparation, filing assistance, tax advice, and related client services within its scope.
Defense Cost Coverage
Valuable inclusion paying legal fees to defend the preparer in the event of a claim, audit, or investigation regardless of fault or outcome.
Breach of Contract Coverage
Provides protection if a preparer fails to meet service agreement terms through no intentional fault of their own.
Cyber & Privacy Liability
Modern coverage for expenses related to data breaches, cyber-attacks, and privacy regulation compliance. Often an add-on endorsement.
Seek carriers with strong industry experience, financial stability, and a commitment to tax preparer E&O. Reputable underwriters ensure smooth, responsive claims handling critical in the event of an error or dispute.
Now that we’ve analyzed key policy attributes, let’s compare top E&O insurance providers serving tax preparers.
Leading E&O Insurance Companies for Tax Pros
When shopping for coverage, consider established carriers known for expertise and competitive rates in the tax prep space. Here are several top E&O insurance options:
CNA TaxPro
A large national insurer with decades of experience insuring accountants and tax preparers. Offers high policy limits and extensive industryspecific coverages.
Harper/Protex
Specializes solely in E&O products for tax and accounting professionals. Flexible policy structures and personalized service from licensed agents.
IRS Taxpayer Advocate Service
Features an affordable group E&O plan exclusively for enrolled tax preparers administered by Hylant. Minimum $25,000 per-claim coverage.
Aon
Global insurance broker handling E&O placement for small firms and sole practitioners. Partners with multiple insurers to build customized packages.
BerkleyTaxPRO
Part of W. R. Berkley Corp., this established provider caters tailored policies to CPAs, enrolled agents, and other tax specialists.
Do extensive research comparing rates, inclusions, reputation, and ease of claims filing between top options. Ask other preparers for provider recommendations too.
Now that we’ve explored E&O insurance basics, requirements, and leading carriers, let’s address some frequently pondered questions tax preparers have:
E&O Insurance FAQs
1. What if my state doesn’t require E&O coverage – should I still get it?
Even without a mandate, E&O insurance is recommended as a risk management best practice. It demonstrates due diligence to protect clients and can be required by credentialing bodies like the IRS.
2. How much coverage do I really need?
Most experts advise a minimum of $100,000 per claim and $250,000 aggregate limits. Higher-risk specialties like accounting or complex returns may need $500,000 or more. consult providers.
3. Will my E&O rates go up if I have a claim?
One claim typically doesn’t impact future pricing, but multiple substantiated errors over time may cause rates to increase at renewal. Proper risk management prevents this.
4. What exactly is covered – just preparation or other services too?
Most policies cover preparation errors as well as additional tax advice, filing assistance, and common ancillary services like bookkeeping if fees are disclosed. Read your policy details.
5. How does my coverage interact with other professional liability insurance?
E&O is separate from general business liability or error coverage through other licenses like CPA malpractice insurance. You need all applicable types based on your credentials and services offered.
