When you hire a tax professional, you are trusting them with sensitive financial information and relying on their accuracy. But even qualified, experienced professionals can make mistakes. Understanding whether your tax professional carries professional liability insurance — also known as errors and omissions (E&O) insurance — gives you an important layer of protection if an error occurs.
What Errors and Omissions Insurance Covers
Errors and omissions insurance for tax professionals covers claims arising from mistakes, omissions, or negligence in the preparation of tax returns or the provision of tax advice. If a preparer’s error results in penalties, interest, or additional taxes owed, and the preparer was at fault, this insurance can provide a mechanism for compensation to the affected client.
Without this coverage, a sole practitioner who makes a significant error may lack the financial resources to compensate a client even if they are willing to do so.
How to Ask About Professional Liability Insurance
The most direct approach is to ask the tax professional directly: “Do you carry professional liability or errors and omissions insurance?” A professional who carries this coverage should be able to confirm it without hesitation. You may also ask whether their firm has a written policy for how client errors are handled when they occur.
Larger CPA firms and established tax advisory practices almost universally carry professional liability insurance. Sole practitioners and smaller CTEC-registered preparers may or may not carry it. This is especially relevant if you are considering a newer or less established preparer.
CTEC’s Bonding Requirement
Note that California Registered Tax Preparers (CRTPs) are required to hold a $5,000 surety bond through CTEC registration. This bond is not the same as errors and omissions insurance — the bond amount is relatively small and is intended primarily to protect against fraud rather than professional errors. It is not a substitute for E&O coverage.
Verifying California CPA Firm Compliance
The California Board of Accountancy (dca.ca.gov/cba) licenses CPAs and CPA firms in California. Licensed firms are subject to professional standards that include requirements around client service obligations, though insurance requirements vary. CPAs are bound by the AICPA Code of Professional Conduct, which includes obligations regarding client care and disclosure of errors.
When in doubt, ask your prospective tax professional directly about their insurance coverage and their firm’s error-resolution procedures before signing an engagement agreement.
Official sources referenced: IRS.gov, California Board of Accountancy (dca.ca.gov/cba), California Franchise Tax Board (ftb.ca.gov). Not reviewed by a credentialed tax professional.