In today’s increasingly complex tax and regulatory environment, tax professionals face more risk than ever before. From evolving IRS rules to aggressive state enforcement and heightened client expectations, even the most experienced practitioner can make a mistake—or be accused of one.

Errors & Omissions (E&O) insurance, also known as professional liability insurance, is not just a “nice-to-have.” It is a critical layer of protection for CPAs, Enrolled Agents, tax preparers, and advisory firms.

Here’s why.

1. Tax Work Is High-Stakes by Nature

Tax professionals handle sensitive financial information, prepare legally binding returns, and offer advice that directly affects a client’s financial outcome. A simple oversight—misreporting income, missing a deadline, misclassifying an expense, or misunderstanding eligibility for a credit—can result in:

• IRS penalties and interest
• State-level assessments
• Amended returns
• Lost refunds
• Client audits

Even when the error is minor, the financial consequences can be significant. Clients who suffer financial harm may seek compensation—regardless of intent.

E&O insurance is designed to protect professionals against claims of negligence, errors, omissions, or failure to perform professional services.

2. Lawsuits Happen—Even If You Did Nothing Wrong

One of the most overlooked reasons to carry E&O coverage is this:

You can be sued even if you are not at fault.

Legal defense costs alone can be devastating. Attorney fees, expert witnesses, court filings, and settlement negotiations add up quickly. Even if a claim is ultimately dismissed, the cost to defend yourself could reach tens of thousands of dollars.

E&O insurance typically covers:

• Legal defense costs
• Settlements
• Court judgments
• Claims investigation expenses

Without coverage, those costs come directly out of your business—and potentially your personal—assets.

3. The IRS and State Enforcement Environment Is More Aggressive

The IRS has increased enforcement efforts, including scrutiny of:

• Employee Retention Credit (ERC) claims
• R&D tax credits
• Pass-through entity tax strategies
• Improper deductions
• ITIN-related filings

As scrutiny rises, so does client frustration when audits occur. Even if the position taken was reasonable and defensible, clients may blame the preparer for the inconvenience or additional costs.

E&O insurance protects your firm when enforcement activity turns into a professional liability claim.

4. Client Expectations Are Higher Than Ever

Modern clients expect:

• Immediate responses
• 100% accuracy
• Proactive tax strategy
• Audit-proof returns

In a world shaped by instant digital access and financial apps, tolerance for human error is low. Miscommunication, misunderstood advice, or documentation gaps can easily escalate into disputes.

E&O coverage acts as a financial backstop when expectations and outcomes do not align.

5. Even Small Firms Are at Risk

There is a misconception that only large CPA firms need professional liability insurance. In reality:

• Sole practitioners
• Virtual tax firms
• ITIN specialists
• Bookkeeping firms offering tax prep
• Boutique advisory practices

are often more vulnerable because they may lack in-house legal resources.

A single claim could threaten the survival of a small practice. E&O insurance helps protect business continuity.

6. Contracts and Partnerships Often Require It

Banks, lenders, financial institutions, and referral partners may require proof of professional liability insurance before entering into agreements.

If you work with:

• Mortgage brokers
• Investment advisors
• Payroll providers
• Business formation services
• Corporate clients

E&O insurance may be a prerequisite.

Carrying coverage strengthens your professional credibility and signals that you operate with risk management in mind.

7. It Protects Your Personal Assets

Many tax professionals operate as LLCs or S-Corporations. While these structures offer liability protection, they do not shield you from professional negligence claims in every circumstance.

In some cases, plaintiffs may attempt to pierce the corporate veil or name you personally in a lawsuit.

E&O insurance provides financial defense beyond your entity structure, helping protect:

• Personal savings
• Retirement accounts (subject to state protections)
• Home equity
• Future income

8. The Cost Is Often Lower Than the Risk

Compared to the potential cost of a lawsuit, E&O premiums are typically modest.

Premiums vary based on:

• Revenue
• Services offered
• Claims history
• Coverage limits
• Deductibles

For many tax professionals, annual premiums are far less than the cost of defending even one claim.

When evaluated as part of a broader risk management strategy, E&O insurance is a practical and strategic investment.

9. It Encourages Better Internal Controls

Obtaining E&O coverage often requires firms to:

• Document engagement letters
• Maintain standardized processes
• Improve documentation retention
• Implement review procedures
• Adopt cybersecurity safeguards

In that sense, E&O insurance doesn’t just transfer risk—it can help reduce it by encouraging stronger operational practices.

10. Peace of Mind During Tax Season

Tax season is stressful enough.

Knowing you have professional liability protection allows you to focus on:

• Serving clients
• Delivering strategic advice
• Growing your firm

without constantly worrying about the financial impact of an unforeseen claim.

Final Thoughts

No tax professional plans to make an error. But in a profession built on complex regulations, tight deadlines, evolving credits, and human judgment, risk is unavoidable.

Errors & Omissions insurance is not a sign of weakness—it is a mark of professionalism.

In an environment of increased enforcement, rising client expectations, and expanding advisory services, E&O coverage is one of the most important protections a tax professional can carry.

It safeguards your business.
It protects your reputation.
And it ensures that one mistake—or one accusation—doesn’t end everything you’ve built.