What Can a Tax Preparer Be Held Liable For?
Facing a lawsuit is a tax preparer’s worst nightmare. They’re costly and time-consuming. Unfortunately, even the most meticulous preparer may face a lawsuit at some point in their career.
Any tax return mistake, no matter how small, could result in legal action. A particularly litigious client could sue you, even if you believe your work was flawless. You’ll still have to defend yourself in court. Likewise, other mishaps can occur at your office, like an unexpected injury or property damage.
If you don’t have tax preparer insurance, these events can stifle your tax preparation business. To get the appropriate amount of insurance coverage, you must first understand what you’re liable for as a tax preparer.
What is the Scope of Tax Preparer Liability?
As you learn how to become a tax preparer, liability coverage should be at the forefront of your mind. As a tax return preparer, you have liability as a general business owner and as a tax professional. Thus, you can benefit from the following insurance policies.
Professional Liability Insurance
In addition to being a business owner, you are also a tax professional. It’s your job to know tax law inside and out. Since your clients pay for your services and expertise, they expect an accurate tax return.
If one of your clients gets audited by the IRS and they find a mistake, you might be liable. Thus, your client can sue you, forcing you to pay for the resulting tax penalties, IRS interest fees, and legal expenses.
Tax Preparer Liability
According to the IRS, your clients can file a claim against you if you do any of the following:
- Fail to inform them before filing their Form 1040
- Alter their tax return documents
- Use an improper filing status
- Report an inaccurate amount of income
- Use the wrong Preparer Tax Identification Number
- Forget to sign their tax return
- Refuse to provide them a copy of their tax return
- Refuse to release their records until they pay for your services
- Misrepresent your qualifications
Any of these actions, even if done unintentionally or in good faith, can land you in legal trouble.
Tax Preparer Liability Penalties
When the IRS reviews your client’s claim, the resulting penalties may include:
- Monetary penalties – Depending on the mistake you made, the monetary penalties can range between $50 up to $100,000.
- Temporary suspension – If you made a serious error, you may receive a court-mandated injunction, meaning you won’t be able to prepare taxes for a specified amount of time.
- Reopening old tax returns – To make sure you didn’t make the same mistake in the past, you may also have to re-open every “like and non-like” return that the statute of limitations permits.
For a comprehensive list of all preparer penalties, review the IRS’ list.
Dealing with these penalties from the IRS requires time, money, and legal representation. The costs can really add up. However, with professional liability insurance, you’ll be able to get through it financially.
General Liability Insurance
As a business owner, you are liable for any accidents that take place in your office. If you conduct work at your clients’ homes, you’re also liable for what happens during these meetings. Your general liability includes claims of:
- Bodily injury
- Personal injury
- Property damage
In turn, one client’s accident in your office—a slip and fall, tripping on a loose wire, etc.—could make you liable for their costly medical expenses. Likewise, if you visit a client at their home and accidentally break something, you will have to make amends financially.
Either one of these scenarios may also require some level of legal defense. If you don’t want to pay out of pocket, you must invest in general liability insurance.
Cyber Liability Insurance
These days, most of your tax preparation will be done digitally using a tax return preparation software. Even though such tools enhance convenience and efficiency, they also present some security concerns. A professional tax preparer has access to their clients’ most sensitive data, including:
- Bank account numbers
- Social Security numbers
- Health insurance records
- Home addresses
- Driver’s license numbers
The IRS is well aware of this, which is why they have put it into law that you must protect your client’s data. If you fail to employ the necessary protective measures, such as using current anti-malware and anti-virus software, or if they fail due to being outdated or not updated, you will be liable for the consequences of a data breach.
Fortunately, if you have cyber liability insurance, you’ll be able to cover the costs of the breach, including the necessary legal representation and data recovery efforts.
Protect Yourself Today With Tax Preparer Liability Insurance
As you can see, tax preparers have a lot of liability. To protect yourself, you need the proper amount of tax preparer liability insurance. The sooner you get your coverage, the better.
At NOW insurance, it only takes a few minutes to receive an insurance quote. NOW Insurance is known for its affordable prices, 20 years of experience, and customizable insurance plans. Get your tax return preparer insurance coverage today.
- IRS. Make a Complaint About a Tax Return Preparer. https://www.irs.gov/tax-professionals/make-a-complaint-about-a-tax-return-preparer
- IRS. Summary of Preparer Penalties under Title 26. https://www.irs.gov/tax-professionals/summary-of-preparer-penalties-under-title-26
- IRS. Data Privacy and Cybersecurity for Tax Professionals. https://www.irs.gov/pub/irs-utl/2018ntf-cybersecurity-for-tax-professionals.pdf