Tax preparers and enrolled agents have significant legal exposures. Consider some of the potential claims you might face and how professional liability insurance can help you mitigate them.
“Nothing is certain except death and taxes,” said Benjamin Franklin in 1789. But today, you can argue that there’s another sure thing, which is the risk of facing tax preparers when filing an incorrect return.
In truth, not every filing mistake leads to litigation. But many do. And when legal judgements ensue, tax preparers may regret not following another Franklin tip, “when in doubt, don’t.”
Tax Preparation Legal Liabilities
Today, you’re dealing with not only with people’s money but also their relationship with the often-feared Internal Revenue Service (IRS). When you make mistakes that cost them money, either in the form of higher tax liabilities or penalties, you will likely have an unhappy client on your hands. If the error is large enough or results in them being audited, you might find yourself a litigation target.
Making matters worse, not only are you vulnerable to civil litigation alleging professional negligence, but clients can also file claims with the IRS itself. For example, if you alter their tax returns without telling them, Use an improper filing status or misrepresent your qualifications, among many other transgressions, clients have a statutory right to file a claim against you and your business. Depending on the nature of your error, the IRS might fine you between $50 to $100,000, as well as temporarily revoke your ability to file taxes on your own and as an agency (if an owner).
Fortunately, professional liability insurance can shield you against lawsuits and cover legal expenses related to an IRS proceeding. By transferring your liability risks to your insurance company, you will be able to operate your business knowing a serious lawsuit won’t destroy your career or consume your personal assets. In addition, seeing if cyber-security is part of the offering would protect your digital assets for both your company and your client’s personal information. Having these in place gives you a peace of mind and is priceless.
Legal Risks and Claims Scenarios
Creating and filing tax returns for a fee can be legally hazardous. You might miss allowable deductions or fail to sufficiently document claimed individuals on a return. Submitting wrong information or missing a key filing date can land the client in hot water, either in terms of owning higher taxes or having to pay IRS penalties. When your client is in trouble, you will likely be in danger as well.
Mounting data breaches against accounting and tax firms have significantly increased liability exposures. When hackers break into a tax professional or enrolled agents computer and steal valuable client information, they can use it to file IRS returns claiming phony tax refunds. Because tax prepares and enrolled agents must maintain data privacy, a cyber-breach can have negative legal and IRS consequences.
The point is your legal exposure as a tax preparer or enrolled agent is broad and hard to predict. As the federal tax code becomes more complex over time (a highly likely prospect), your liabilities will rise in tandem.
What does this mean for your work as a tax preparer and enrolled agent? It means you potentially face liability for a claim. All you can do is know the tax code, adhere to tax-filing best practices and be transparent with your clients when problems arise.
To illustrate further, the following are several potential claim scenarios that might cause stress and worry for tax preparers and enrolled agents:
As you can see, the claim scenarios just listed were varied. But they shared some common themes:
The point is, as a professional tax preparer or enrolled agent, you will consistently be exposed to legal risk because you’re human and susceptible to making mistakes. Enrolled agents who transfer their risks to an insurance company make it easier to resolve such claims than if they were uninsured. That’s because insurance companies are equipped to process claims and have the financial resources to deploy a robust legal defense on your behalf.
The Importance of Tax Preparer or Enrolled Agents Professional Liability Insurance
As a tax preparer or enrolled agent, it’s essential to protect your business and personal finances against client litigation, both justified and contrived. The solution is to buy professional liability insurance designed to cover your specific job duties and issued by an insurance company you trust. Here’s what you’ll receive when you transfer your legal risks to an insurance carrier:
As important as the above intrinsic benefits, the extrinsic benefits of having professional liability insurance are even more critical.
Lauren Pitonyak, is a Program Manager for Tax Preparer Professional Liability Insurance at 360 Coverage Pros/Gallagher. Gallagher is a global leader in insurance, risk management and consulting services. Lauren can be reached at Lauren_Pitonyak@ajg.com