Tax preparers play a vital role in helping individuals and businesses comply with tax laws. However, the profession comes with significant financial risks, including errors in tax filings, client lawsuits, cyber threats, and even workplace injuries. Without adequate protection, a single mistake or unexpected incident can lead to costly legal battles, reputational damage, and financial loss.

Investing in insurance for tax preparers is the best way to safeguard your practice against these risks. This guide will explore different types of insurance, common risks, costs, and how to choose the best policy for your business.

Types of Insurance for Tax Preparers

To ensure complete financial protection, tax preparers should consider several types of insurance. Here’s a breakdown of the most important policies:

Professional Liability Insurance aka Errors & Omissions (E&O) Insurance

• Covers claims of negligence, mistakes, or omissions in tax preparation.
• Protects against lawsuits from clients who suffer financial loss due to tax errors.
• Includes legal defense costs, settlements, and judgments.
• Example: A client sues after receiving an IRS penalty due to an incorrect tax deduction.

Cyber Liability Insurance

• Protects against data breaches, cyberattacks, and identity theft.
• Covers legal costs, data recovery expenses, and client notification fees.
• Example: A hacker steals client tax records, leading to lawsuits and regulatory fines.

Workers' Compensation Insurance

• Required in most states if you have employees.
• Covers medical expenses, lost wages, and rehabilitation costs for work-related injuries.
• Example: An employee develops carpal tunnel syndrome from excessive computer use.

General Liability Insurance

• Covers bodily injury, property damage, and personal injury claims from third parties.
• Protects against lawsuits arising from slips, falls, or accidental damage in your office.
• Example: A client trips in your office and sues for medical expenses.

Business Owner’s Policy (BOP)

• Bundles multiple coverages, including:
  • General liability insurance
  • Commercial property insurance (for office space or equipment)
  • Business interruption insurance (covers lost income due to unforeseen disruptions)
• Cost-effective for tax preparers with a physical office.

Each of these policies plays a key role in safeguarding a tax preparation business.

Professional Liability Insurance: The Most Essential Coverage

Among all the types of insurance available, professional liability insurance (also known as Errors & Omissions insurance) is the most crucial for tax preparers as it covers a professional's primary business risk.

What Does Professional Liability Insurance Cover?

• Errors in tax preparation – Mistakes that result in IRS penalties for clients.
• Omissions in tax filings – Forgetting to include critical information in a tax return.
• Negligence claims – Allegations that a tax preparer provided incorrect tax advice.
• Legal defense costs – Covers attorney fees, settlements, and court expenses.

Example Scenario:

A client sues a tax preparer for filing an inaccurate return, which results in an IRS audit and penalties. Professional liability insurance covers the defense costs and potential settlement.

Cost of Insurance & Factors Affecting Pricing

The cost of insurance for tax preparers depends on several factors:

Key Factors Affecting Cost:

1. Coverage Limits & Deductibles – Higher limits mean higher premiums.
2. Business Size & Revenue – Larger firms typically pay more.
3. Location – Costs vary based on state regulations and business risks.
4. Claims History – A clean record leads to lower premiums.
5. Type of Coverage – Bundling multiple policies can provide cost savings.

Estimated Annual Insurance Costs:

Common Risks Faced by Tax Preparers

Tax professionals face various risks that can lead to legal and financial consequences:

1. Tax Preparation Errors – A miscalculation or omission could result in IRS penalties and client lawsuits.
2. Data Breaches & Cyber Threats – Handling sensitive financial data makes tax preparers a target for hackers.
3. Client Lawsuits – Disgruntled clients may claim negligence or financial losses due to poor tax advice.
4. Regulatory Compliance Issues – Tax laws change frequently, increasing the risk of non-compliance.
5. Office Accidents – If a client or employee is injured at your workplace, you could be held liable.

Without the right insurance for tax preparers, these risks can result in significant financial setbacks.

Benefits of Insurance for Tax Preparers

Investing in insurance offers numerous advantages:

✅ Legal & Financial Protection – Covers legal defense costs, settlements, and damages.
✅ Safeguards Reputation – Demonstrates professionalism and builds client trust.
✅ Regulatory Compliance – Some states and professional organizations require liability coverage.
✅ Peace of Mind – Allows tax preparers to focus on work without worrying about unexpected risks.

Is Insurance Required for Tax Preparers?

While insurance for tax preparers is not legally required in most states, certain professional organizations and industry standards recommend or mandate coverage.

When is insurance mandatory?

• If you are a Certified Public Accountant (CPA), professional liability insurance is often required.
• If you hire employees, workers’ comp insurance is mandatory in most states.
• Some business contracts or client agreements may require proof of insurance.

Even if not legally required, having professional liability and cyber insurance is highly recommended for tax preparers to protect against costly lawsuits.

How to Choose the Right Policy

When selecting insurance for tax preparers, keep these factors in mind:

✅ Coverage Scope – Ensure your insurance program covers tax errors, cyber risks, and liability claims.
✅ Policy Limits & Deductibles – Balance cost and protection.
✅ Exclusions – Read the fine print to avoid gaps in coverage.
✅ Insurer Reputation – Choose a trusted provider with strong financial ratings.
✅ Customization Options – Some insurers offer tailored policies for tax professionals.

How to File an Insurance Claim?

If a client sues or an incident occurs, follow these steps to file a claim:

1. Notify Your Insurer Immediately – Report the issue as soon as possible.
2. Gather Documentation – Collect contracts, tax returns, and correspondence related to the claim.
3. Work with Your Insurance Provider – Your insurer will assign a claims adjuster to assess the situation.
4. Follow Legal & Regulatory Guidelines – If the case involves compliance issues, seek legal advice.
5. Track the Claim Process – Stay informed about settlements or court proceedings.

Having insurance for tax preparers ensures that legal defense and settlement costs are covered.

Conclusion

Insurance for tax preparers is essential for protecting your business, clients, and reputation. Whether you need E&O, general liability, or cyber insurance, investing in the right coverage ensures long-term success.

To find the best insurance policy, compare quotes from trusted providers today!