How to Help Reduce Your Professional Liability Risk This Tax Season

Reducing Professional Liability Risk During Tax Season

Professional liability risk for accountants performing tax services can arise from: 

• Mistakes in preparing and filing tax returns on behalf of clients
• Cyberattacks that jeopardize clients’ financial data and personal information 
• Client requests for additional services outside the scope of a CPA’s expertise

However, you can help lower the probability of any of these from happening and help reduce your professional liability risk this tax season by following these steps.

1. Stick to Your Scope of Services

Perhaps you are only supposed to provide tax services, but your client is requesting more concrete solutions to their business management issues at the same time. It is important, as their accountant, to provide evidence-based recommendations that you encounter as a part of your financial analysis, but not to make any business decisions on their behalf. 

Going beyond the scope of your initial services can expose you to potential mistakes down the road and invites litigation with your client. If you want to expand on the services you offer, plan and prepare at a less busy time of year. 

2. Specify Your Services to the Client

If you have a solid idea of the services you provide but your client doesn’t, this can result in the client expecting more, and filing a claim because you did not reach their standards. To prevent potential misunderstandings regarding the services you provide, make sure to properly specify them in writing. 

You can do this by crafting an engagement letter clearly defining what is and is not within the scope of the services you are to provide. The letter should likewise be signed by the client. If additional services are required, draft a separate engagement letter or amend the original to define the scope of these ancillary services. Even for a simple tax engagement, updated engagement letters should be acknowledged and signed by the client each year. 

3. Have a Signed CPA Engagement Letter

An engagement letter is a useful way to prevent professional liability risks when preparing tax services. A signed engagement letter shows that you and your client are both in agreement about the provision of services on your part. 

Make sure to review the engagement letter every year and advise your client that they need to sign a new one before you commence your tax services. This ensures that both yours and the client’s expectation regarding the services to be rendered continue to align.  It also allows for both you and your client to ask questions about the nature of the services and clarify any confusion before starting any work. 

4. Secure Your Data

Cyberattacks are a real, growing, and ongoing concern for CPAs. In 2019, 8.5 billion records were accessed through cybersecurity breaches, with the financial services industry being the most targeted. The data and personal information you retain from your clients is considered highly sensitive and losing that information could expose you to potentially devastating consequences ranging from monetary damages to regulatory action and reputational harm. 

Ensuring cybersecurity is vital during tax season to help prevent technological disruptions, reputational damage, and compromised data. You can help protect your data by making sure your anti-virus software is updated, using multi-factor authentication to access your network, sending encrypted email communications, and limiting access to client information to only those individuals with a clear need to access the data.  

5. Ensure Your Client Holds Up Their End

When it comes to performing quality services, both you and the client should be in sync regarding information-gathering. This includes making sure the client provides relevant financial records to you on time and presenting you with accurate and complete data. Otherwise, you may end up providing services based on incomplete information. This could end up seriously jeopardizing not only the quality of your work, but your reputation as well, which can result in a professional liability claim or litigation and increased scrutiny from tax authorities. 

To ensure your client holds up their end, make sure to define their obligations in the engagement letter, and require that they acknowledge and sign the letter before you commence any services. 

6. Secure a Professional Liability Policy

Sometimes, you can follow all the necessary preventative measures and it may still be not be enough. Professional errors often occur during the hectic busy season and demonstratively increase the possibility of a client filing a claim or lawsuit against you. 

To help reduce the damages that a legal claim can cause to your finances and your reputation, make sure you have a professional liability insurance plan in place. This type of insurance helps protect you in situations of negligence (failing to adhere to specific accounting standards or tax regulations), inaccurate advice, misrepresentation, and errors and omissions. 

Reduce Professional Liability Risk with AICPA Member Insurance Programs

Even with this year’s unprecedented risks for CPAs, there are ways you can help prevent potential mishaps. Make sure that you and your clients are on the same page, stick to your scope of service, and record everything on paper. To help further reduce professional liability risk, consider acquiring a professional liability policy to help cushion the financial impacts of mistakes arising from your professional services.

AICPA Member Insurance Programs can help protect you and reduce the damage that professional liability lawsuits can heap on your company. 

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.