Liability insurance for accountants: Extra risks

December 26, 2024 1:15 PM

The risks accountants face multiply and morph over time, and keeping up with them — and the insurance necessary to protect your firm from them — can be difficult.

For a look at some of the profession's biggest risks, see our feature story, and our story on the best approach to buying appropriate coverage.

For a deeper dive on some other new and emerging risks, Stephen Vono, senior vice president at McGowanPro, put together a panel of experts to answer additional questions regarding the current liability scene for accountants. In addition to Vono, the team consists of Gary Sutherland, a head underwriter at McGowanPro; Anthony Carolei, the risk manager for Hanover Insurance; and attorney Ralph Picardi, a defense attorney for accounting firms with Picardi LLC.

The team highlighted a number of areas of risk:

Tax remains at the top

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Liability risks for accountants have not changed much over the last few years. Accountants who specialize in tax preparation incur a higher frequency of claims. Tax claims tend to arise from alleged errors and omissions that cause late filings, late payments, missed elections and lost refunds. Accountants who specialize in audit see a lower frequency and a much higher exposure.

Trustee services without trust indemnification

Estate plan, living will and trust documents

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Accountants should be sure there is indemnification language in the trust documents for them as trustee, as well as indemnification language in the engagement letter in their favor.

Sales tax nexus

Cash receipt illustrating the spent money

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Be sure proper nexus studies are done to verify all states that clients need to pay sales tax in. Accountants need to be sure the engagement letters define the scope of sales tax services being performed, if any. Many times, clients assume that because the accountant is doing their business taxes, the accountant is also performing sales tax filings.

Denied appeals

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The panel reported seeing an increase in claims involving the IRS denying appeals. This is a concern because the accountant many times will assist the client in the IRS appeal but does not notify their professional liability insurance carrier of the incident. The appeal goes on for over a year and because the accountant is confident the appeal will materialize, they continue to not report the incident, or they do not even understand this could be reportable to the insurance company. The insurance policy is renewed and after the renewal, the claim comes in because the IRS denied the appeal. Prior knowledge of the incident and not reporting the incident at the time of the renewal could result in the claim being denied by the insurance company.

Subpoena risks

A recent court ruling in Illinois advances a conspiracy case against prominent Wall Street banks.

Accountants are still a subpoena target for the financial records they possess. Subpoena submissions have stayed consistently high for accountants. Business and personal divorces seem to always generate the need for subpoena assistance for accountants. Furthermore, criminal investigations of accountants' clients can be a ripe source for subpoena and pre-claim assistance. If the IRS hires the additional agents they want to hire and go after tax cheaters, accountants will see an even higher rate of subpoena assistance needed.