Best practices for engagement letters, POAs, and tax return extensions.

• Author: Slatten, Pamela
• Position: Powers of attorney

Provide clarity and avoid scope creep with a carefully drafted engagement letter

This discussion focuses on how and why to use engagement letters and what they should cover. The primary purpose of using a letter to define a professional relationship is to ensure that the client and the practitioner agree upon the services that are to be provided. Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), Section 10.33, Best Practices for Tax Advisors, states that a practitioner should communicate clearly with the client regarding the terms of the engagement; a signed engagement letter provides clarity and prevents scope creep.

An engagement letter is also a valuable tool for cementing the relationship with a new client, particularly when there is a delay between accepting a new client and beginning services. Furthermore, defining the scope and agreeing upon the terms in writing clarifies the client's expectations and builds trust by preventing the billing of services that were not anticipated by the client. It also removes any ambiguity regarding who the client is, especially when the practitioner is dealing with a representative of a business.

In addition, clarifying the services through an engagement letter acts as a primary defense against malpractice claims. Disagreements arise when clients believe you are handling their taxes but do not understand exactly what that might entail or encompass. A clearly defined engagement letter sets out the scope of services, defining what the practitioner has agreed to do, what the client has agreed to do, and what the practitioner will not be doing. Additionally, malpractice insurance premiums may be increased without the consistent use of engagement letters.

The importance of being specific

The benefits of engagement letters are often limited by vagueness and the omission of useful provisions. For instance, tax forms should be listed specifically, rather than using a general phrase like "all income tax returns" or "all state tax returns" and should patently exclude all returns and forms not listed. For instance, specifically mentioning and excluding any foreign reporting requirements such as the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is prudent, considering the potential for significant penalties.

Tax planning and consulting should be excluded from engagements that are merely for tax return preparation and should ideally be dealt with under a separate engagement letter with clearly defined parameters. Clients can become upset when they discover that they have missed a tax-saving opportunity, regardless of whether they were paying for proactive tax advice. Clients' expectations of CPAs generally include tax-saving advice, so being specific about tax services can prevent a client from looking to the firm to provide remuneration for a missed opportunity.

Useful provisions to include

Because firms may not have liability protection in the event of a data breach (although this optional coverage is recommended when available), an engagement letter can offer additional protection with a provision to disclaim liability from a data breach that occurs through no fault of the firm. Reasonable measures must be taken to ensure security of data, but language providing protection is helpful when reasonable measures fail.

Practitioners should also consider a conflict-of-interest waiver clause for related parties, divorcing couples, or multiple shareholders or partnership situations. These waivers can be a part of the engagement letter or executed in conjunction with the engagement letter.

The following points should also be included in the engagement letter:

* Alternative dispute resolution provisions;

* Venue in the event of a civil claim;

* A clause to limit liability to a percentage of fees, if allowed under applicable state law;

* Termination date for services (to trigger the statute of limitation);

* Date by which information must be provided by the client to complete the work on time;

* Language about filing extensions for tax returns;

* Statement of client asserting the completeness and accuracy of the data provided;

* Disclaimer that the firm is not verifying or auditing data;

*...