For many small-businesses or independent tax preparers, the first few months of the year mean a crescendo of business. While staying busy is good for your bottom line, it also presents more opportunities for committing the kinds of errors and omissions that can result in legal trouble down the road.
So just in time for 2013’s tax season, we present a refresher course on the basics of Errors and Omissions (E & O) Insurance liability insurance and how to mitigate your professional liability risk this year.
Errors and Omissions Liability Recap
While the threat of facing a malpractice suit might haunt your tax-season dreams, keep in mind that certain conditions must be in place in order for one of your clients to prevail in an errors and omissions suit against you:
- You must have owed a duty to your client (the taxpayer).
- You must have somehow failed to perform that duty.
- Your client must have sustained demonstrable injuries.
- There must be a clear causal link between the injury in question and your mistake or oversight.
Even if all those criteria are met, however, you may still be found free of liability in a malpractice suit. If, for example, you offered advice that was accurate at the time but later became inaccurate because of new case law, you likely will not be found liable. In other words, you can’t be held accountable for knowing laws or policies that were not yet in place when you performed your services.
Mitigating Your Malpractice Risk
Naturally, E&O Insurance helps protect you in the event of a malpractice lawsuit. To minimize your risk of being found liable in the event that one of your clients brings such a suit, be sure to implement a number of risk-reduction practices, including…
- Notify your insurance provider as soon as you notice that you’ve made any mistake that could trigger a malpractice suit. Most Errors and Omissions Insurance policies require this behavior from policyholders; if you fail to notify your company, you may risk losing your coverage – especially if a lawsuit is brought against you.
- Push your clients to submit amended tax returns when appropriate. In the event of a lawsuit, evidence of such advice will demonstrate that you performed your duty adequately.
- Require your clients to review their tax returns prior to submitting them. If a client gives his or her seal of approval on a tax return before it’s submitted, some of your liability for its contents may be reduced.
- Terminate client relationships when necessary. If a client seems especially contentious or unwilling to submit amendments, you may be better off severing ties to prevent malpractice claims.