Which insurance does a tax preparer need?
Here's what each common policy is for. Which ones you buy depends on how you work: from home or an office, alone or with staff, in person or remotely.
| Policy | What it's for | Who usually carries it |
|---|---|---|
| Errors and omissions (E&O), or professional liability | Client claims that a mistake, omission or negligent act in your tax work cost them money | Nearly every paid preparer |
| General liability | Bodily injury or property damage claims, such as a client slipping in your office | Offices that meet clients in person; often required by landlords |
| Cyber / data breach | Costs after a hack or data breach: notification, recovery and related claims | Any office that stores client data electronically |
| Business owner's policy (BOP) | Bundles general liability with property coverage | Offices with equipment or a leased space |
| Workers' compensation | Employee injuries on the job; required by most states once you have employees | Offices with staff |
| Surety bond | Not insurance. Protects clients; required to register in California ($5,000) and Nevada ($25,000) | Preparers in those two states. See tax preparer bonds |
What errors and omissions insurance covers
E&O protects you when a client claims your professional work caused them a financial loss: a missed deduction, a math or data entry error, a missed deadline, or advice that turned out wrong. Depending on the policy, it can pay for:
- Your legal defense, including when a claim turns out to be groundless.
- Settlements and court judgments up to your policy limit.
- Correction costs, such as preparing an amended return. Some policies also reimburse a client's penalties or interest caused by your error, and some don't. Read the policy wording on penalties and interest before you buy.
- Representation during audits or tax-authority inquiries tied to your work, on many policies.
What E&O usually doesn't cover
- Intentional, fraudulent or criminal acts. No policy covers a preparer who knowingly files a false return.
- Claims from before your retroactive date. Most E&O policies are claims-made, so coverage depends on having a policy in force when the claim arrives, back to the retroactive date on the policy.
- Cyber incidents and data breaches, which normally need a separate cyber policy.
- Injuries, property damage and employment disputes, which fall under general liability, property and employment policies.
- Services you didn't list, such as investment advice or bookkeeping. Disclose every service you offer on the application.
- The client's own tax. The tax a client legally owed is theirs to pay, whoever prepared the return.
Is E&O insurance required for tax preparers?
Usually not by law. The IRS doesn't require insurance for a PTIN or an EFIN, and E&O usually isn't required by state law. But some clients, employers, landlords and partners ask for proof of coverage, and a single claim can cost more to defend than years of premiums. Bonds are different: California and Nevada require a tax preparer bond to register, and a bond is not insurance, because you repay the surety for any claim it pays.
Why cyber insurance matters for a tax office
Tax files hold Social Security numbers, bank accounts and income data, which makes preparers a target. The FTC Safeguards Rule lists tax preparation firms among the businesses it covers. It requires a written information security program with a Qualified Individual, a risk assessment, encryption, multi-factor authentication, staff training, oversight of service providers and a written incident response plan. If a breach involves unencrypted information of 500 or more consumers, you must notify the FTC as soon as possible and no later than 30 days after discovery.
Cyber insurance doesn't replace those safeguards, but it can help pay for breach response: forensics, notifying clients, credit monitoring and related claims. Ask what the policy requires of you, such as multi-factor authentication, because insurers can deny claims when required controls weren't in place.
How to buy E&O insurance: what to check
- Limits: the most the policy pays per claim and per year. Pick limits that match your client count and the complexity of the returns you prepare.
- Deductible: what you pay before coverage starts.
- Retroactive date and no gaps: keep coverage continuous. When you switch carriers, have your agent carry over the retroactive date so past work stays covered.
- Defense costs: whether defense costs reduce your limit or are paid in addition to it.
- Penalties and interest: whether the policy reimburses client penalties and interest caused by your error.
- Covered services: that every service you offer is listed, including bank products and any bookkeeping.
- Who's covered: employees and seasonal preparers, if you have them.
- Quotes: get at least two or three. Professional associations, your software provider and independent agents can all point you to tax-preparer programs.
Insurance is cheaper than mistakes
The best protection is not making the error: good training, a second review on complex returns, a clear engagement letter and solid due diligence on credits. Partner offices with us get professional software, training and season support with $0 upfront, plus their marketing launch done for them. Insurance stays your own policy and your decision. See how we work.
Common questions
Do tax preparers need E&O insurance?
It usually isn't required by state law or by the IRS, but most paid preparers carry it, because it pays defense costs, settlements and judgments when a client says your mistake cost them money.
Does E&O insurance pay IRS penalties?
It depends on the policy. Some E&O policies reimburse a client's penalties and interest caused by your error, and some exclude them. Check the policy wording before you buy. No policy pays the tax the client legally owed.
Is a tax preparer bond the same as insurance?
No. A bond protects your clients, and you repay the surety for any claim it pays. E&O insurance protects you. Only California ($5,000) and Nevada ($25,000) require a tax preparer bond.
Do tax preparers need cyber insurance?
It isn't required, but tax files are a target for criminals. The FTC Safeguards Rule covers tax preparation firms and requires a written security program, and cyber insurance can help pay for breach response.
What is claims-made E&O coverage?
Most E&O policies are claims-made: they cover claims made while the policy is in force, for work done after the policy's retroactive date. Keep coverage continuous so past work stays covered.