errors by commercial tax preparers

Three years ago, H&R Block was in the news for admitting it had made big mistakes on its own corporate income tax returns, with cumulative understated tax liability of $32 million.

Perhaps it should have bought its own "Peace of Mind" audit insurance policy?

Like Block, most major tax preparers will automatically stand behind the returns they prepare by paying any additional interest and penalties charged by the IRS due to preparer mistakes. What they won't automatically pay is the amount of the actual additional tax liability assessed in the audit.

So H&R Block sells its clients a $30 "Peace of Mind" policy that will cover up to $5,000 worth of any additional tax assessed in an IRS audit due to its errors. That sounds like a pretty profitable deal for H&R Block, since only about 1% of all tax returns are audited, and errors due to tax preparer error are frequently likely to be less than $5,000.

Commercial preparers that use TaxWise software have the opportunity to sell their clients a similar product offered by TaxWise called "Audit Shield," which costs $25 and covers up to $2,500 of understated tax liability due to preparer error.

Tax preparers that offer such audit insurance products typically reserve the right to sell them to taxpayers whose returns involve particularly complicated issues. In addition, collecting on the policy requires that the taxpayer follow all required producedures with the company providing the policy, which can be tedious and time-consuming. Such policies generally exclude coverage of errors due to the taxpayer providing incorrect or incomplete information to the preparer.