Kicking off tax season with engagement letters and organizers.

AuthorCrisler, Michael W.

It is that time of year again: Tax practices are preparing engagement letters and tax organizers to send out en masse to clients to kick off another tax season. While it is tempting to go with the status quo and do the same thing as last year, it may be beneficial to consider making changes.

Tax engagement letter

The tax engagement letter is usually the first written communication a tax practice has with its client each year. It is also an important piece of evidence if the firm is ever sued. The engagement letter can be either a first line of defense or evidence against the firm.

It can be difficult to come up with the appropriate language to include in an engagement letter if the firm is starting from scratch. Even if the firm is not starting from scratch, the language should be reviewed annually. A good place to start would be to contact the insurance company from which the firm purchases its malpractice policy. The insurer may provide sample engagement letters to its customers. The AICPA Tax Section also provides engagement letter templates. The Tax Section has partnered with CNA, the endorsed underwriter of the AICPA Professional Liability Insurance Program, to provide Tax Section members access to engagement letters developed for policyholders. Many tax research services also offer sample engagement letters.

Before sending out engagement letters this year, firms should consider the following:

Identifying the client: It may seem obvious, but it is critical that the engagement letter specifically address the proper client. When a firm is working with a client that owns multiple entities, trusts, etc., it may want to consider attaching an addendum to the engagement listing each tax reporting entity involved in the engagement letter for that client.

Period covered: The engagement letter should establish the period covered. An engagement could be performed for a calendar year, a fiscal year, a technical termination year, or a short year. It may also be of value to the client to mention the due date of the filing or filings covered by the engagement. With the recent changes in due dates, some clients may still not be aware of the current due dates for partnerships and C corporation returns.

Services to be performed: An effective engagement letter will outline the exact services that are to be performed for the client. Is the service limited to preparing the tax return, or will the firm provide a menu of tax services such as tax planning, audit representation, advisory council meetings, and the like? If tax planning services will be performed, indicate how often--quarterly, semiannually, or just at year end.

The firm should consider including several paragraphs that speak to the scope of the engagement and identify the tax returns and/or other services that the firm will or will not perform, such as:

* Bookkeeping services to get financial information into a condition where the tax return can be prepared;

* Preparation of financial statements (usually noting that they are covered under a separate engagement letter);

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