By: Lauren Pitonyak

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: 

  • The heirs of a wealthy high-tech entrepreneur were disappointed when their enrolled agent missed a filing deadline, exposing the entrepreneur’s estate to IRS penalties and interest charges. When the enrolled agent could not provide a reasonable explanation for why the filing didn’t occur on time, the heirs met with their attorney and decided to file a lawsuit against the agent to recover their losses. 
  • An enrolled agent filed a client’s corporate tax return after the federal deadline. The resulted in a late filing penalty and interest. Again, the client filed a claim for the penalty and interest.  
  • An accountant who also prepares taxes incorrectly calculated a client’s estimated tax payments. The client carefully made the estimated quarterly payments the accountant recommended but still fell short of making enough contribution against that year’s tax liability. The payment gap led to a $9,000 penalty, which the client demanded the enrolled agent pay.  
  • An enrolled agent neglected to include an important schedule in multiple years’ tax returns. This resulted in a significant tax underpayment, sparking penalties and interest. The enrolled agent was liable for the penalties and interest.  

 

As you can see, the claim scenarios just listed were varied. But they shared some common themes:  

  • The enrolled agent either made a mistake or failed to do something important. 
  • The error or omission cost the client money, not to mention aggravation. 
  • The passage of time sometimes compounded the enrolled agent’s mistake. 
  • Clients were unhappy about the ensuing tax problem(s) and wanted financial compensation. 

 

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: 

 

  • A claims adjuster and a defense attorney to manage your case and mount a strong legal defense, both at no additional charge to you. 
  • Hiring of an expert witness (or expert witnesses) in order to strengthen your legal case. 
  • Access to arbitration, mediation or other forms of dispute resolution, which might produce a resolution sooner than with traditional litigation.  
  • Payment of court administration fees. 
  • Legal help with handling an IRS disciplinary proceeding. 
  • Attorney guidance with responding to subpoenas or request for documentation or testimony. 
  • Expense benefits relating to participation in the trial or arbitration sessions. 
  • Employee theft coverage. 

 

As important as the above intrinsic benefits, the extrinsic benefits of having professional liability insurance are even more critical.  

 

  • It reduces financial doubt. Professional liability insurance replaces a considerable, unknown risk (the chance of getting sued) with a smaller, known expense (insurance premium). Most tax preparers and enrolled agents understand the benefit of this trade.  
  • It provides convenient access to a proven defense attorney. If a customer sues you, mounting a swift defense is important. Professional liability insurance equips you with an attorney and handles other legal logistics.  
  • It reduces stress. Facing a lawsuit can be an incredibly stressful and time-consuming experience. First, it raises the possibility of liability for a large settlement or judgement. Second, it can also raise questions about your professional competence, which may become public. Professional liability insurance pays for an attorney to help dismiss the claim(s) or settle outside of court. 
  • It fills in coverage gaps that general liability or other business insurance fails to address. Many tax preparers and enrolled agents believe their general liability insurance or business owner’s policy (BOP) covers professional mistakes or negligence. In most cases, it only covers third-party injuries and property damage, not mistakes made during the rendering of tax-related professional services. 

 

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