Filing a tax return can be a long and complicated process, filled with obscure questions and piles of paperwork. Many people lack the know-how, patience, knowledge, and time to do the work themselves. That’s why special programs and tax preparation services exist. As a tax preparer, your clients depend on you to provide them with reliable advice. Whether they are asking you about which expenses they can write off, or what the rules are for handling multiple sources of income, your judgment can have a significant impact on their bottom line.

As a tax preparer, you’ve probably received training that ranges anywhere from an informal course at a local college to a full accounting degree. Regardless of your background, clients trust you to handle sensitive information. If you have ever made a mistake on someone’s tax return, chances are the customer wasn’t happy. Some dissatisfied customers may go so far as to sue you over the error. The financial impact of a lawsuit can be potentially devastating to your company. That’s why it’s essential to choose the right insurance coverage to protect you from these and other unexpected costs.

You might want to purchase insurance for your tax preparation business if:

• You want financial protection in case a client attempts to sue you
• You store sensitive information like tax records on your company’s computers
• You have valuable furniture or equipment
• You often interact with customers or clients on your premises
• You work in an office building, outside of your home

What insurance coverage do I need as a tax preparer?

The best insurance policies for a company that specializes in tax preparation often overlap with more general business insurance. Because your business probably works extensively with confidential and sensitive data and can be held responsible for professional errors, you should consider purchasing professional liability insurance and cyber liability insurance. Listed below are the major insurance coverages you should pay attention to.

Professional Liability Insurance or Errors and Omissions (E&O) Insurance

Everybody makes mistakes, but if you work as a tax preparer, those professional mistakes can create serious problems for your customers. Tax preparers are especially vulnerable to lawsuits because the errors they make have the potential to land their client in financial trouble. Professional liability insurance can protect you from a lawsuit, whether or not your company is at fault, if you are accused of making an error in your work. Covered areas for professional liability insurance include negligence, misleading statements, performance, and breach of duty.

Examples:

• Errors/Negligence: You prepare a client’s taxes, only for an IRS audit to reveal numerous mistakes in his return. Your client is required to pay additional penalties and fees, and he decides to sue you for negligence.
• Lawsuit without merit: A client hires you to prepare their taxes, but after you show the client that he owes tens of thousands of dollars in back taxes, he decides to ignore your work. Instead, he files his taxes himself, ignoring the large tax bill he owes. After he is prosecuted by the IRS for tax evasion, he blames your tax prep company and sues you for negligence.

General Liability Insurance

General liability insurance can help protect your tax prep service from the financial burden of a lawsuit that is unrelated to your work with taxes. The four types of coverage that are included in general liability insurance are: products & completed operations, property damage, bodily injury, and personal & advertising injury.

Examples:

• Property Damage: A client brings in their new tablet computer to show you an important document that’s relevant to their taxes. He slips on a loose piece of carpet in your office, knocking the tablet to the ground. He decides to sue you for the $2000 it would cost to buy another one.
• Bodily Injury: You have a kitchen in your office, and a co-worker spills water but neglects to clean it up. A client runs through the area on his way to an appointment. He slips and breaks his arm. He decides to sue you for medical expenses.
• Advertising Injury: You have an inspirational idea for a new ad. It features intricate drawings of adding machines and 1950’s style office workers who are looking up in awe at your company’s name in lights. It just so happens that another firm uses the exact same ad, and you accidentally copied it after remembering it in a dream last week. They sue you.

Commercial Property Insurance

If there is extensive physical damage to property or equipment that you lease or own, the expense of replacing it can negatively affect your bottom line. Commercial property insurance protects you from these costs. The included damage can happen to a building or item that you rent, lease, own, or have borrowed from someone else. Covered items include, but are not limited to: paintings, furniture, office equipment, and computers.

Examples:

• Buildings: An electrical fire breaks out in your office building, destroying the walls and flooring of your workspace. The construction company you hire says it will cost $20,000 to repair.
• Contents: There is a leak in your building’s water supply and a pipe directly above a row of desks leaks steadily overnight. When you arrive in the morning, the wooden desks and chairs are completely ruined due to water damage.
• Property of Others: You borrow a copy machine from the business next door to you. A hailstorm shatters the window above the copy machine, and the storm eventually ruins the machine.

Cyber Liability Insurance

As a tax preparer, most of your work will be done through a computer, and many of your tax filings are done over a network. That’s why it’s especially important to guard your business against the negative impact of any technological mishaps. Cyber liability insurance can protect you from hacking, viruses, data breaches, and other cyber perils.

Cyber liability insurance also covers the costs of:

• Lawsuits against you for lost data
• Notifying customers and business partners about a data breach
• Marketing to restore your reputation
• Lost income
• Lost or damaged electronic data

Example:

• One of your employees accidentally installs malicious spyware, which infects the other computers on the network and takes down your intraoffice system, destroying much of your proprietary data. You need to hire consultants to determine the extent of the damage and also help recover lost data.

Business Owner’s Policy

A business owner’s policy, also known as a “BOP,” can cover risks that are common to all business owners. If you own a small tax preparation service and you work with customers inside of commercial space you rent or own, a business owner’s policy may be a good solution for you. Accidents, however unexpected, can always happen. In this type of plan, general liability, business interruption, and property insurance are bundled together to address your needs as a small business owner. This coverage can protect you from a lawsuit and pay to cover the replacement costs of some types of damage.

Business Interruption Insurance

Business interruption insurance, also known as business income insurance, covers lost income if your business is unable to operate due to damage or destruction to your property. If a problem forces you to temporarily halt operations, you will still be liable for paying employees, landlords, rental fees, and more. Business interruption insurance covers the lost revenue. Business interruption insurance is not sold on a standalone basis, but can be added to your commercial property insurance or business owner’s policy.

Example:

• A fire destroys your offices in the middle of tax season. Because much of your business depends on walk-in clients, you lose a substantial amount of income while your office is repaired.

Conclusion

Purchasing insurance can protect your tax preparation business from the financial burden of any unexpected lawsuits or property damage. As a business that helps clients file tax returns, you are especially vulnerable to lawsuits over any errors or mistakes one of your employees might make. A faulty tax return can land a client in trouble with the IRS, and if penalties against them are severe enough, they might be driven to seek legal action. Like all small businesses, you can also be sued for an accident that occurs on your property, e.g. a bodily injury lawsuit over a faulty staircase. Therefore, it is wise for you to invest in buying insurance to ensure that your company will continue to thrive.