Instant Tax Preparer Bonds

Do you want to make sure your tax preparer is trustworthy? That’s where tax preparer bonds come in. These bonds are like insurance policies that protect you and the government if your tax preparer makes mistakes or acts dishonestly. Whether you’re someone who prepares taxes or someone looking for a tax preparer, it’s important to know about these bonds and how they protect everyone involved.

What Is A Tax Preparer Bond?

A tax preparer bond is a type of license and permit surety bond that some state governments require to ensure tax preparers comply with all applicable state regulations and laws.

The bond is a financial guarantee that the tax preparer will perform their services in an honest and professional manner and will reimburse clients for any losses resulting from any professional misconduct, immoral or illegal activity.

If a client suffers a loss due to their tax preparer’s misconduct, the client can file a claim against the bond to recover the damages. The tax preparer is responsible for paying any claims that are made against the bond.

How Do Tax Preparer Bonds Work?

A tax preparer bond is a promise that a tax preparer will follow all state rules when preparing and filing taxes. States usually require these bonds before giving tax preparers their license to work.

To get bonded, tax preparers pay a fee to a surety company who then issues the bond. This bond is a promise that the tax preparer will do their work honestly and properly, and will pay back clients if they make mistakes or do something wrong.

If a client loses money because of something the tax preparer did wrong, the surety company will look into what happened. If they find the client’s complaint is valid, they’ll pay the client up to the full bond amount. The tax preparer then has to pay back the surety company.

This system protects clients from losing money if their tax preparer breaks rules or makes mistakes. It also encourages tax preparers to do good work, since they’ll have to pay for any mistakes they make.

Why Are Tax Preparer Bonds Important?

Not following tax laws can result in serious consequences for your tax business. You could face fines up to $25,000 for each violation and even jail time. Your clients could also lose money if your services are dishonest.

To protect both your clients and the government, you must register your tax preparation business before offering services. This isn’t optional – it’s required by law.

To register, you need to have enough financial security (like a bond) to pay back clients if they lose money due to dishonest practices.

If you don’t follow registration requirements, you could face additional $10,000 fines for each violation. You could also be banned from offering tax services for three years. This is why having proper financial security is so important.

Three Parties to a Tax Preparer Bond

A tax preparer bond typically involves three parties:

1. The Principal

This is the tax preparer professional who is required to obtain the bond. They are responsible for paying for the bond and for ensuring that they comply with all relevant tax laws and regulations.

2. The Obligee

This is the party that requires the bond, usually an individual or company who employs the services of a tax professional. The obligee is protected by the bond, and can make a claim against it in the event that the principal fails to comply with applicable laws or regulations.

3. The Surety

This is the company or organization that issues the tax preparer bond. They are responsible for ensuring that any claims made against the bond are valid, and for paying out any valid claims that are made against the bond up to the bond’s full amount.

Tax Preparer Bond Benefits

A tax preparer bond provides several benefits to both the tax preparer and the public. Some of the main benefits of a tax preparer bond include:

1. Protection for the government and the public: A tax preparer bond serves as a guarantee to the government that any financial damages caused by the preparer’s negligence or fraud will be covered by the bond. This provides protection for the government and the public against illegal or unethical actions taken by a tax preparer.
2. Compliance with state laws: Many states require tax preparers to obtain a bond as a condition of operating their business and preparing taxes for clients. By obtaining a bond, a tax preparer demonstrates their willingness to comply with state laws and regulations, which helps to ensure the integrity of the tax system.
3. Maintaining public trust: A tax preparer bond symbolises a tax preparer’s commitment to operating their business with integrity and in good faith. This can help to build and maintain public trust in the tax preparer and the tax system as a whole.
4. Financial protection: A bond also serves as a form of financial protection for the tax preparer. In the event that a client makes a claim against the tax preparer for any financial damages, the bond can help to cover those costs and protect the tax preparer’s personal assets.
5. Professionalism: A bond is a signal of the professional attitude of the preparer towards his work and the client, as obtaining a bond is an indication of commitment to the profession and following the laws and regulations.

Cost of Tax Preparer Bonds

The cost of a tax preparer bond varies depending on several factors:

1. Bond amount: The required bond amount varies by state, but typically ranges from $5,000 to $50,000.
2. Credit score: Applicants with good credit (650+) typically pay 1-3% of the bond amount, while those with lower credit scores may pay 5-15%.
3. Business experience: Tax preparers with established businesses and clean records may qualify for lower rates.
4. State requirements: Different states have varying bond requirements which can affect the overall cost.

For example, a $5,000 tax preparer bond might cost:

• $50-150 annually for good credit
• $250-750 annually for fair credit
• $500-1,500 annually for poor credit

The premium is typically paid annually to maintain active bond coverage. Some surety companies offer payment plans to help spread out the cost over several months.

Common Tax Preparer Bond Claims

Common claims against tax preparer bonds typically include:

1. Filing errors: Mistakes in tax calculations or improper filing procedures that result in financial losses for clients.
2. Fraudulent activities: Intentional misrepresentation of information on tax returns or theft of client funds.
3. Missed deadlines: Failure to file taxes by required deadlines, resulting in penalties for clients.
4. Identity theft: Misuse of clients’ personal information for fraudulent purposes.
5. Unauthorized operations: Preparing taxes without proper licensing or registration.

When a claim is filed, the surety company investigates to verify its validity. If found valid, they compensate the client up to the bond amount, and then seek reimbursement from the tax preparer.

To avoid claims, tax preparers should:

• Maintain detailed records of all client interactions
• Double-check all calculations and entries
• Stay current with tax laws and regulations
• Implement strong data security measures
• Communicate clearly with clients about deadlines and requirements

Special State Tax Preparer Bond Requirements

Tax preparer bond requirements vary by state. Here are some notable state-specific requirements:

1. California: Requires a $5,000 tax preparer bond. All tax preparers must register with the California Tax Education Council (CTEC) and maintain an active bond.
2. Oregon: Tax preparers must obtain a $30,000 surety bond and register with the State Board of Tax Practitioners.
3. New York: Requires tax preparers to register with the Department of Taxation and Finance and maintain professional liability insurance or a surety bond.
4. Maryland: Tax preparers must register with the state and obtain a $50,000 surety bond.

Each state has its own specific regulations regarding:

• Bond amounts required
• Registration and licensing procedures
• Renewal requirements
• Educational prerequisites

It’s essential to check with your state’s regulatory authority to ensure compliance with local requirements, as regulations can change and vary significantly between jurisdictions.

Bond Renewal Process

Tax preparer bonds typically need to be renewed annually to maintain active coverage. Here’s what you need to know about the renewal process:

1. Timing: Renewals should be completed before the current bond expires to avoid any gaps in coverage. Most bonds expire one year from their effective date.
2. Renewal notice: Your surety company will usually send a renewal notice 30-60 days before expiration. However, it’s the tax preparer’s responsibility to ensure timely renewal.
3. Requirements check: Review current state requirements as bond amounts and other requirements may change between renewal periods.
4. Updated information: Provide any changes to your business information, including address, ownership, or financial status.
5. Premium payment: Pay the renewal premium, which may vary from your original premium based on claims history and credit changes.

If you miss your renewal deadline, you may need to apply for a new bond rather than a renewal. Operating without an active bond can result in penalties and license suspension, so it’s crucial to maintain continuous coverage.

How to Become a Registered Tax Preparer?

Becoming a registered tax preparer typically involves a combination of education and professional experience, as well as passing a competency exam. The specific requirements vary by state, but in general the steps to become a registered tax preparer include:

1. Education: Many states require tax preparers to have at least a high school diploma or equivalent. Some states also require preparers to have completed a certain number of college-level courses in accounting or a related field, or to have a degree in accounting or another relevant field.
2. Professional experience: Some states require tax preparers to have a certain amount of professional experience working in the tax preparation field, such as a certain number of years working as a tax preparer or in a related field.
3. Pass a Competency Exam: Tax preparers will have to pass a test known as the Registered Tax Return Preparer (RTRP) test, which assesses the individual’s knowledge of tax preparation, filing and tax laws.
4. Obtain a PTIN: All tax preparers who are preparing federal tax returns for compensation, must have a valid Preparer Tax Identification Number (PTIN).
5. Obtain a Bond: Many states also require tax preparers to have a bond in place as a condition of operating their business, which guarantees that the preparer will comply with all relevant tax laws and regulations.

It’s worth noting that different states have different regulations, so it’s important to research and understand the specific requirements for your state. In addition, the IRS sets standards for tax preparers and may have their own set of regulations which needs to be met.

How to Get a Tax Preparer Bond

Getting a tax preparer surety bond involves several steps. These vary according to state, but typically include:

1. Determine the bond amount required: The bond amount required will vary depending on the state where the tax preparer operates and the specific requirements of that state.
2. Find a surety bond provider: There are many companies and organizations that provide surety bonds, including insurance companies, bonding agencies, and banks. Tax preparers should look at bond providers who provide rapid, instant bonds.
3. Complete an application: The provider will require an application which will ask for details about the tax preparer, the business, and the financial situation.
4. Underwriting process: After completing the application, the surety company will review the applicant’s credit score, personal financial statements and other required documents, to determine the risk of issuing the bond. If any issues arise, the underwriter may ask for additional information or a higher premium.
5. Pay the premium: If the bond is approved, the tax preparer will need to pay the bond premium, which is usually a percentage of the bond amount.
6. Obtain the bond: After paying the premium, the bond provider will issue the bond, and send it to the tax preparer. Tax preparer should keep a copy of the bond, as well as any supporting documentation, in case it is needed in the future.

We should point out that if the tax preparer’s application for a tax preparer bond is rejected because of poor credit history or other issues, they may still have options such as getting a co-signer to back them or going for a higher premium. It’s also important to renew the bond annually in order to keep it active and in force.

Tax Preparer Surety Bonds FAQs

Which states require tax preparer bonds?

All U.S. states require tax return preparers to be bonded. You may be required to show proof of your bonding when registering your business with the state tax authorities.

How much does a tax preparer bond cost?

The cost of a bond varies depending on the amount of coverage you need and the credit profile of the applicant. Applicants with low credit scores will usually have to pay a higher premium than those with good credit profiles.

Is my tax return preparation business required to have a bond?

Yes, all tax return preparation businesses are required to be bonded in order to protect their clients against the risk of financial loss as a result of dishonest actions on the part of the business.

How much is a $5,000 tax preparer bond?

This depends on the credit score of the applicant and the amount of coverage they need.

Should tax preparers be bonded?

In California, a tax preparer cannot work unless they are currently registered with CTEC and have a $5,000 Tax Preparer Bond in force.

Should a CPA be bonded?

Only in California are professional tax filing specialists required to have a tax preparer bond. These bonds are designed to provide private citizens with some level of security that their taxes are being handled by qualified experts who will carry out the assignment in an honest and transparent manner.

Are CPAs accountable for tax errors?

If a tax preparer made a mistake on, whether intentionally or inadvertently, the preparer was responsible. Since 2007, a tax preparer is now responsible for any errors made on any return.

If a tax preparer misled on taxes, what happens?

File an amended return as quickly as you can if you discover a mistake on your taxes. Make a complaint to the IRS if you think your preparer has been dishonest.

Can I inform the IRS about a tax preparer?

Fill out Form 14157, Complaint: Tax Return Preparer PDF, and mail it to the IRS along with any necessary supporting documents to report a tax return preparer for dishonest tax preparation methods. You can mail or fax the form and supporting materials, but do not send them both.

How can I get a tax preparer bond?

Simpli Surety Bonds is the fastest and easiest way to secure your tax preparer bond. With our comprehensive online bond catalogue, simply fill out our online form and get bonded immediately.