Tax Preparer Insurance 101

July 21, 2020 •

Tax preparation is complex and many Americans hire a professional tax preparer to take the process off their hands. As one of these tax preparers, the complexity of taxes means job security for you. However, it also means more room for mistakes and liability. 

Your clients expect you to be up-to-date on tax law and to prepare their returns with exceptional attention to detail. Since your clients’ relationship with the IRS is on the line, any mistake you make could result in a claim against you, along with a hefty lawsuit. 

Thus, it’s in your best interest to purchase comprehensive tax preparer insurance. So what is tax preparer insurance and how can you get the right liability coverage for your business? 

What is Tax Preparer Liability?

If you’re in the process of learning how to become a tax preparer, you need to also become aware of how important professional liability is. As a tax professional, you have professional liability. In other words, if you fail to satisfy your clients’ expectations, they have the right to sue you. Whether their claims are valid or not, you still need to defend yourself in court. 

Furthermore, all business owners have liability for what happens on their premises. For instance, if you go to serve your client a cup of hot coffee and it spills all over their lap, burning them, you may have to foot the bill for their medical expenses. And if you damage your client’s property during a home visit, you will be financially liable for restoring their home.

Finally, tax professionals have cyber security liability. You deal with your clients’ most sensitive data. From social security numbers to bank account information, it’s your job to keep this data secured. However, in the digital age, a data breach can happen at any time. Even if you take preventative measures, you can still be held liable if your clients’ data is compromised.

The Types of Tax Preparer Liability

So what is the scope of tax preparer liability? You can sum it up into the following: 

  • Professional liability
  • General liability
  • Cyber liability

Your specific level of liability depends on how large your tax preparer business is, how many clients you have, and whether you have an office space, among other factors. 

How to Protect Against Your Tax Preparer Liability

Now that you understand your scope of liability as a tax preparer, you need to ask yourself an important question: Are you prepared to face a costly lawsuit?

A lawsuit could be thrown your way for claims involving any of the following:

  • Professional negligence or malpractice
  • Office injuries or property damage 
  • A data security breach

If you’re not insured, these situations could put your assets at risk. Fortunately, there’s an easy way to safeguard your tax preparation business from these situations—purchase tax preparer insurance. 

What is Tax Preparer Insurance?

Tax preparer insurance encompasses the following policies:

  1. Professional Liability Insurance
  2. General Liability Insurance
  3. Cyber Liability Insurance

Let’s review each of these insurance policies in a little more detail. 

Tax Preparer Errors and Omissions Insurance

Errors and omissions insurance (another term for professional liability insurance) exists to protect professionals in the case that their services disrupt and financially harm a client. If this happens, clients can file a claim and seek damages. A professional liability insurance policy is crucial for anyone who provides:

  • A professional service 
  • A contractual service to their clients
  • Professional advice as apart of their service

As a tax preparer, you fall into all three of these categories. For instance, if you make a mistake on a client’s tax return, and they get audited by the IRS, they could be harmed financially by penalties, IRS interest fees, and legal defense costs. Similarly, if you offer them poor tax advice, they could hold you responsible for the outcomes. 

Even if you are confident in your professional services, many lawsuits are filed against tax preparers each year. The last thing your tax preparation business needs is to get sued without professional liability insurance. 

What Does Professional Liability Insurance Cover?

Professional liability insurance insulates your business from the costs associated with claims of professional negligence, malpractice, or inaccurate advice. These include: 

  • Legal judgments
  • Settlement costs
  • Legal defense costs

If you don’t have a professional liability insurance policy, such expenses could be nearly impossible to recover from. You could be forced to sell your personal assets to pay for the ordeal, including the lawyer bills and client reparations, leaving you high and dry financially.

Thus, professional liability insurance is a non-negotiable for all prudent tax preparers. 

General Liability Insurance

As its name suggests, general liability insurance is important for businesses in general. Tax preparation companies are no exception. General liability insurance protects your business from costs associated with: 

  • Property damage – If you or one of your employees damage a third party’s property this insurance policy will cover the costs. 
  • Bodily injury – If a third party gets injured on your premises, general liability insurance will cover the costs of their medical bills, as well as any associated legal fees. 
  • Personal injury – If a third party incurs financial expenses, lost wages, or pain and suffering at the hands of your business, you can pay them back for it, as well as pay for your legal defense.

Even a simple slip and fall on a loose computer cord in your office could spell a bodily injury claim. Or maybe you knocked something over a prized painting in your client’s home during a meeting. A client could even claim your services caused them great emotional pain and suffering. Any of these situations could result in an expensive bill with your name on it.  

Furthermore, regardless of how outlandish the claim, you still have to deal with it legally. You’d be surprised how litigious people can be these days. Rather than finding out the hard way, do yourself a favor and secure your practice with general liability insurance. This way, you’ll be protected from any third-party claims of injury or property damage that come your way. 

Cyber Liability Insurance

As a tax professional, you use digital tools to conduct business efficiently. You probably spend a lot of time on the computer, from using your tax preparation software to sending e-returns with your EFIN. In turn, a lot of your clients’ data gets stored digitally. This data includes their most valuable information, such as their:

  • Social security numbers
  • Bank account numbers
  • Driver’s license numbers
  • Passport numbers
  • Credit history
  • Home address
  • Medical information

Due to this serious responsibility, the IRS urges all tax preparers to have a security plan in place, encompassing the following steps:

  1. Reduce the risks of a cyber attack
  2. Carefully monitor your digital systems for potential threats
  3. Manage the damage if a data breach occurs

By following these steps, you reduce the risk of exposing your clients’ data to prying eyes. However, even if you have anti-virus and anti-malware software installed on your computer, you could still be at risk. Cyber attacks are on the rise and small businesses are particularly vulnerable. If a data breach impacts your clients, it’s up to you to fix it, and the process can be expensive.

Why Should You Purchase Cyber Liability Insurance?

To protect yourself from the costly repercussions of a cyber security breach, you need to get cyber liability insurance. 

It will cover the costs of: 

  • Notifying customers of the data breach
  • Recovering their lost data
  • Restoring their identity
  • Upgrading your vulnerable digital systems
  • Defending yourself legally, if necessary

Imagine the peace of mind you could enjoy if you knew you were covered in any of those scenarios. You’d be able to take on more clients with confidence. 

How Are Coverage Costs Determined?

Now that you understand the importance of tax preparer insurance, you may be wondering: How much will these liability insurance policies cost? 

Policies are priced based on the risk you present to the insurance company. To determine your risk, your insurance provider will ask you the following questions:

  • Do you work from home?
  • Do you use an office space?
  • Do you visit clients in their homes?
  • How many employees do you have?
  • What valuable business equipment do you use?

After reviewing these factors, you’ll receive a quote for your premium. Whatever the price is, it’s lower than the costs of forgoing insurance coverage, especially if you want to grow your business over time. As your business grows, you will need to increase your coverage, since you’ll be exposed to more risk. However, if you protect your business when it’s small, it will have a much better chance at growing in the future. 

NOW Insurance: Affordable Tax Preparer Insurance

To get quality tax preparer insurance, visit NOW Insurance. You will find professional liability, general liability, and cyber liability policies all in one place. 

NOW Insurance’s policies are flexible, affordable, and available right away. The NOW Insurance experts work closely with you to design the perfect insurance coverage policy based on your tax preparer business’ needs. In turn, you’ll receive a comprehensive, customized insurance plan.

NOW Insurance allows you to pay your premiums monthly or yearly, depending on your preference. By bundling multiple insurance policies, you’ll also enjoy lower premiums. Best of all, you can get a quote in minutes using NOW Insurance’s simple and easy-to-use application process. 


  1. IRS. Make a Complaint About a Tax Return Preparer.
  2. IRS. Data Privacy and Cybersecurity for Tax Professionals.
  3. Small Business Trends. 43 Percent of Cyber Attacks Target Small Business.