Tax preparer bonds are a subset of the broader license bond category that must be filed with state government agency responsible for regulating tax preparation in the preparer’s jurisdiction as a condition of licensure for most tax preparers. Currently, California is the only state to have a surety bond requirement for tax preparers; however, E&O policies for tax preparers are available in all 50 states.
Tax preparer bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a tax preparer bond, will also be referred to as the “surety company” or the “bond company”. Tax preparer bonds refer to the license holder as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Tax preparers are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a license holder breaking tax preparer license statutes. The surety company provides the government a guarantee (the surety bond) that the customers licensed tax preparer will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the tax preparer license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, tax preparers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Tax preparer bond violations triggering a bond payout may include a preparer making fraudulent or misleading representations on a customer’s tax documents, operating as a tax preparer without the proper licensing, and failing or refusing to provide a customer with copies of any documents requiring their signature.
Tax preparer bonds cost $25.00 for a 1 year bond with the option of issuing the bond for up to a 5 year term.
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Credit checks are not required for tax preparer bonds.
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and tax preparer(principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the preparer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a tax preparer bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 tax preparer bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Tax preparer bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the tax preparer and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the preparer failing to pay premiums due, claim payouts, or material changes in the tax preparer's credit score. Tax preparer bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Tax preparer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.
To find information on specific tax preparer bonds, select the state and use our search function to find any requirement across the country.