Engagement letters: review them before it is too late.

• Author: O'Neill, Joseph C.

Tax practitioners may not think about revisiting their policy on tax engagement letters until they are actually preparing one, or perhaps when they experience an issue with a client that might have been avoided had they revised their policy. But it is often too late at that point. Before the next busy season begins, practitioners should consider taking a fresh look at their tax engagement letter policy.

Tax engagement letters, when used correctly, are a prime example of where doing the right thing pays off for everyone. It is a best practice encompassing regulatory compliance, as well as other risk management and financial management considerations.

Since many firms seem to have a love-hate relationship with tax engagement letters, below are some practical considerations to help practitioners change for the better their relationship status with tax engagement letters (and, perhaps, with clients).

One of the more compelling reasons for using a tax engagement letter is to comply with the best practice standard in Section 10.33(a)(1) of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), which requires tax practitioners to communicate clearly with clients regarding the terms of the engagement. The engagement letter should engender a conversation between the client and the engagement team, which can have multiple positive outcomes, including:

* Understanding the client better,

* Making sure the client understands this is a relationship that needs to work for both parties;

* Identifying additional service opportunities;

* Helping with client acceptance and continuance; and

* Specifying the fee arrangement, including what the client is paying for, which should reduce conflicts later and encourage discussions about out-of-scope work.

An equally compelling reason for having an updated engagement letter policy--especially for the tax practitioner---is malpractice avoidance. Malpractice insurance carriers typically recommend and sometimes even require the use of engagement letters, including specific provisions within the letters. Engagement letter language should be explicit, stating clearly the project's terms and conditions, such as the exact scope, where the work takes place, when the engagement ends, etc.

Tax engagement letters also provide an opportunity to enhance a practice's bottom line. As previously mentioned, the letter should stipulate the services that are part of the project and...