E&O Insurance

[Justataxguy]

My E&O insurance is up for renewal soon, and last week I got an email from ptindirectory.com ( I imagine others here probably got the same offer) with an offer for E&O insurance through CNA Surety. It is about 1/3 the cost of my current policy. I asked my agent if a lower cost policy was available as my volume and type of income tax business just doesn't seem to justify the price of my current policy. He says he can't find anything lower priced. Does anyone have experience with CNA Surety? Here is a link to the email offer - http://www.ptindirectory.com/profess...-insurance.cfm

[DaveinTexas]

My two wooden cents

I haven't heard of CNA Insurance but I use CYA Insurance!! Get it? Sorry for the bad joke. That PTIN Directory website is shifty; I personally wouldn't trust those folks. If you have to trick people to use your service, to me that is unethical. It's like those advertisements you get for lowering your property tax bills.

Anyway, have you tried looking into E&O insurance that is recommended by your professional association? I use a company recommended by NAEA and I have been pleased. Also, be careful with companies that promise low premiums, sometimes the lower premiums mean much less coverage levels (just like auto and home insurance).

Be really selective too, don't just shop the price, shop the validity and track record of the company; it just may mean the difference if you're the unlucky one to ever have to use the policy.

[ttbtaxes]

LLC or corporation

Obviously it makes sense to carry E&O insurance. When you retire, merge, add a partner, drop a partner, sell or stop practicing you can buy a "tail policy". In that case, you should consider whether an unlimited tail rather than the 3-year policy makes the most sense.

Have you considered organizing your practice as an LLC or corporation? Wouldn't that shield you personally from a claim or lawsuit (unless you're an attorney or CPA)?

I rarely see tax preparers operate as a corporation or LLC and can't imagine why everyone (other than attorneys or CPAs) doesn't conduct their practice in that format. First of all, the cost alone to defend a lawsuit can be devastating. I would think a client might think twice about initiating a lawsuit if the entity it sues has few assets and your personal assets can't be reached.

[DaveinTexas]

This strategy works well except.....

Obviously it makes sense to carry E&O insurance. When you retire, merge, add a partner, drop a partner, sell or stop practicing you can buy a "tail policy". In that case, you should consider whether an unlimited tail rather than the 3-year policy makes the most sense.

Have you considered organizing your practice as an LLC or corporation? Wouldn't that shield you personally from a claim or lawsuit (unless you're an attorney or CPA)?

I rarely see tax preparers operate as a corporation or LLC and can't imagine why everyone (other than attorneys or CPAs) doesn't conduct their practice in that format. First of all, the cost alone to defend a lawsuit can be devastating. I would think a client might think twice about initiating a lawsuit if the entity it sues has few assets and your personal assets can't be reached.

in the case of professional providing advice to a client that causes the client irreparable harm (malpractice). I don't think any judge would hold up the protective veil of an entity in this situation. E&O Insurance is specifically designed to protect (somewhat) against these claims.

I attended a seminar recently, the speaker (a well known tax attorney) mentioned a story involving a couple that was close to finalizing their divorce. The husband earned significant income and the wife did not earn any income. The CPA that prepared the return for the couple knew of the pending divorce but advised the husband to file a joint return to lower his tax liability (undisclosed conflict of interest). The wife agrees to sign the return, later on gets other advice from another CPA who tells her that filing separately could have saved her $200,000 in taxes because she earned no income (non community property state). Guess who had to pay up? The wife sued the CPA that prepared the return and won the case. In this situation there is not an entity that would protect you because the advisor is not acting on behalf of the company, rather he is providing professional advice personally (I don't know the legal terms).

And, if the entity is thinly capitalized (little or no assets) this could be seen as a strategy to hide behind the veil. I think too many people count on the protection of an entity but I think the easiest target for a potential claimant is a small business like us. Oh, and if you get the client that likes to brag about how many people he/she has sued, more than likely you may end up on the list.

Get the E&O, gripe about the cost and then pray something like the above situation doesn't happen to you.

[ttbtaxes]

On what basis could the legal veil be pierced? CPAs and attorneys can't escape personal liability but everyone else should be able to be, correct? If a corporation or LLC rendered the services, as evidenced by a signed engagement letter, then how on earth is any judge going to disregard the arrangement?

[AZ-Tax]

S-Corp protection from IRS

Got a new S-Corp who came to me with letters from the IRS for penalties regarding not being timely with the S-Corp's Fed payroll deposits, FTF form 941 etc. After getting POA from the S-Corp, I contacted the local Rev Agent assigned by the IRS and it was at a point where they were going to place a Levy on the S-Corp assets. Though I figured the IRS could not go after the S-Corp shareholder's personal assets, I asked the Rev Agent anyway and sure enough she told me the IRS cannot place a levy on the shareholders personal assets. The question is would a Judge rule the same way?

[DaveinTexas]

Basis of malpractice

On what basis could the legal veil be pierced? CPAs and attorneys can't escape personal liability but everyone else should be able to. If a corporation or LLC rendered the services, as evidenced by a signed engagement letter, then how on earth is any judge going to disregard the arrangement?

You are giving advice to a tax professional (who is not a CPA or Attorney) to form a Corp or LLC because a non CPA or Attorney doesn't have to worry about getting sued personally for engaging in tax prep or tax consulting. I think it is well established that CPAs/EAs and unlicensed tax preparers have been placed on a level playing field. Meaning, the IRS has placed the same ethical standards on unlicensed preparers as licensed preparers (court cases pending). A tax preparer can't count on the fact that they are not licensed as a CPA or Attorney to escape personal liability (torts/malpractice).

Personally, I wouldn't tell someone to expect liability protection by forming an entity when that person is giving professional advice. I hate to have to spend money on this insurance but even I see it's value. I do see the value of forming an entity but ultimately it is the human preparer (not the entity) preparing the return and giving the advice.

[ttbtaxes]

You are giving advice to a tax professional (who is not a CPA or Attorney) to form a Corp or LLC because a non CPA or Attorney doesn't have to worry about getting sued personally for engaging in tax prep or tax consulting. I think it is well established that CPAs/EAs and unlicensed tax preparers have been placed on a level playing field. Meaning, the IRS has placed the same ethical standards on unlicensed preparers as licensed preparers (court cases pending). A tax preparer can't count on the fact that they are not licensed as a CPA or Attorney to escape personal liability (torts/malpractice).

Personally, I wouldn't tell someone to expect liability protection by forming an entity when that person is giving professional advice. I hate to have to spend money on this insurance but even I see it's value. I do see the value of forming an entity but ultimately it is the human preparer (not the entity) preparing the return and giving the advice.

Whoa, Dave in Texas. I am NOT giving advice. I am simply presenting this thought as something for discussion amongst our group. I am not an attorney nor would I ever want to be.

Every tax preparer is governed by Circular 230. My question is this. Are non-CPAs and non-attorneys protected from personal liability if they practice within a corporate or LLC structure? Moreover, I'd bet every state has its own rules so what works in one state may not work in another.

I'm interested in exploring what others are doing.

[DaveinTexas]

Protected from?

No accusations at all, I just misunderstood your post. The reason the E&O companies exist is because the LLC/Corp will not protect us (EAs or unlicensed preparers) from personal liability if the liability arises from providing professional advice (my opinion).

I am not an attorney either. Your original post implied the lawsuit would be targeted at the entity (LLC or Corp) if the tax preparer's company was sued for a bad work product. My opinion is the attorney would direct the lawsuit at the individual tax preparer that made the error and skip bothering with the entity. BUT, the plaintiff's attorney would have to prove the tax preparer owed a duty to the taxpayer, there was a breach of that duty, the plaintiff suffered injuries, and there was a proximate cause between the injury suffered and the duty.

Yeah, I stole that last sentence, and here's my source: http://www.journalofaccountancy.com/...n/20102524.htm

I'd be interested in hearing from someone who has been involved in a client lawsuit and if their E&O "paid off".

You raise an interesting question that I haven't seen posed before in the manner it was posed. All I have are assumptions so feel free to call me a Jack&%$

Sorry for the accusation, maybe that was a bit aggressive. Again, I was trapped in the home for the past 3 days!!! And I found grey hairs in my beard so I am feeling a bit mortal these days!!