Legally required? In most states, no. Necessary? Absolutely.
What E&O Insurance Covers
Errors and omissions insurance (also called professional liability insurance) protects you when a client claims your work caused them financial harm. In tax preparation, this typically means an error on a return that resulted in additional tax, penalties, or interest assessed to the client.
A Real Scenario
You prepare a client’s return. You miss a piece of income because the client forgot to give you a 1099. The IRS sends a notice. The client now owes $3,000 in additional tax plus penalties and interest. The client comes to you and says you messed up their return and they want you to cover the $4,500 cost.
Without E&O insurance, that negotiation comes out of your pocket or leads to a lawsuit with no coverage. With E&O insurance, your carrier steps in, covers the defense costs, and may cover the settlement.
The Cost
Policies for new tax preparers typically run $300 to $700 per year, depending on coverage limits, your deductible, and the number of returns you prepare. Several carriers specialize in coverage for tax professionals.
Why It’s Worth It
Every preparer makes mistakes eventually. Not because they’re bad at their job, but because tax returns involve thousands of data points, human beings make errors, and clients sometimes provide incomplete information. The question isn’t whether something will go wrong. The question is whether you’ll be protected when it does.
One claim without coverage can cost more than a decade of premiums. Get insured before your first client.
For help selecting E&O coverage and setting up your practice properly, visit musespring.com.