With vast tax code changes comes the perfect opportunity to review your malpractice insurance policy and consider increasing your coverage. In this article, Mark Pierce explains how this insurance works and why coverage is essential should you find yourself on the wrong end of a malpractice suit.
Tax laws have a tendency to change how we, as accountants, do business. Recent rises in inflation have led the IRS to raise the federal income tax bracket levels. According to CNBC, these changes may mean that those who earn more money may pay less in taxes as a result. However, while these concerns may or may not affect your clients, you might find yourself wondering if you should upgrade your malpractice insurance to deal with the shifting sands of potential legislation. While we likely pay attention to our malpractice insurance policy only when it’s time to renew, it remains a pillar of our business practice. Let’s discuss what this insurance does for us and whether we should consider updating it to add more coverage.
Accounting Malpractice Insurance at a Glance
Accounting malpractice insurance covers most, if not all, of your legal costs in the unfortunate case that a client sues you for performing substandard work. Malpractice insurance typically covers a wide range of accounting professionals, including accountants, certified public accountants (CPAs) and auditors.
Some common areas that malpractice insurance covers include: providing incorrect tax advice, improperly auditing financial statements, failing to detect misappropriations, giving incorrect advice regarding accounting matters and fraud. Keeping your accounting malpractice insurance up to date is always a good idea.
Massive Changes in Tax Legislation in 2021
The tax code changed significantly over the last year. Here are a few examples of recently passed legislation that may affect how accountants prepare tax returns in the future:
The Consolidated Appropriations Act (2021): This act changes a lot of the fundamentals of filing taxes and introduces a series of credits, deductions, extensions and expansions to the filing process.
Tax Bracket Adjustments: As mentioned above, income tax brackets have been adjusted for inflation. However, based on the inflation rate, this adjustment might change based on how the value of the dollar settles at the end of the next financial year.
Planned Changes to the Alternative Minimum Tax: The Alternative Minimum Tax was created to stop wealthy taxpayers from utilizing too many tax credits. However, the AMT's exemptions didn't account for inflation; therefore, it may need to be updated separately to consider the increased cost of living.
Provisions for the CARES Act from 2020: When the pandemic hit in 2020, the CARES act was meant to provide some relief to taxpayers. Since then, some of the burdens of the CARES act have been extended by the Consolidated Appropriations Act (mentioned above), but others have not, and accountants must know the difference in order to properly file their clients’ taxes.
Why Update Your Malpractice Insurance Now?
Many accounting professionals think that malpractice insurance just works itself out. However, paying attention to what your policy covers is essential. With all these changes in legislation, even a minor slip-up could put you on the wrong end of a lawsuit. There are several different malpractice insurance policy classes, all covering different areas. Among the types of malpractice insurance that accounting professionals may be exposed to include:
Professional Liability: Most accountants have this type of insurance by default. It covers financial damages when an accountant is sued for negligence.
Commercial General Liability: This type of insurance covers a wide range of claims including bodily injury, property damage, personal injury and others that can arise in typical business operations.
Cyber Liability: This insurance helps protect accountants in the event of data breaches or other cybersecurity issues.
The Cost of Coverage
Malpractice insurance needs vary from accountant to accountant, and the malpractice premium you pay will depend on several factors. As with most insurance, the higher the aggregate limit your insurer will pay per year, the more you will pay in premiums.
Is Changing Malpractice Insurance In Your Best Interest?
You should certainly shop around before your policy runs out. While your current insurer may provide you with extra benefits for your ongoing patronage, other malpractice insurance companies may offer better rates. Regardless, maintaining adequate malpractice insurance is important considering the ongoing changes in the tax code.
Mark Pierce, CPA and attorney, is owner of Wyoming-based Cloud Peak Law Group. He has been an attorney for over 30 years. He graduated from the University of Wyoming with a degree in accounting (with honors) and passed the CPA examination shortly after. He previously served as a...