Risk mitigation best practices.

• Author: Sawyers, Roby B.

According to Rebecca Toffolon, assistant vice president at CNA, the endorsed underwriter for the AICPA Professional Liability Insurance Program, "claims related to tax services are not necessarily the largest type of malpractice claims from a dollar perspective, but they typically are the most frequent source of claims. Indeed, approximately 66% of claims asserted against CPAs in the program in 2020 related to tax services. The most commonly asserted causes of loss were improper tax treatment or advice and untimely filing."

Of course, other risks in addition to being sued for malpractice include loss of a CPA license or other credentials, sanctions by the IRS Office of Professional Responsibility (OPR) or state accountancy board, loss of clients, and loss of reputation.

Best practices to reduce the likelihood of claims as well as other risks in a tax practice include using engagement letters, judiciously selecting new clients and retaining current clients, avoiding informal advice, carefully considering the form of advice, exercising care in making recommendations and referrals, and, of course, having robust data privacy and security plans.

Engagement letters

In professional liability cases, the first line of defense is a well-written engagement letter. In addition to reducing the number of claims, the use of engagement letters is also associated with reducing the amount of claims. An engagement letter can be an enforceable contract, so careful wording is important. If you draft your own, a best practice is to have an attorney review it. Malpractice insurance carriers are likely to offer sample engagement letters for individuals, different types of business clients, trusts, and so on. The AICPA Tax Section works with CNA to provide sample engagement letters for tax services to AICPA Tax Section members. The AICPA Tax Practice Responsibilities Committee provides input on the letters from a practitioner's perspective. A more detailed discussion of the importance of engagement letters for small firms can be found in Sawyers, "The Importance of Engagement Letters for Small Firms," 48 The Tax Adviser 764 (November 2018), available at tinyurl.com/yg31pbjd.

Engagement letters should be used to limit the scope of services by specifying the returns and other services for which the firm is responsible and, just as important, services for which the firm is not responsible. Separate letters should be used for business engagements and individual engagements as well as for adult children of clients and should specifically include or exclude filing responsibilities for minor children.

To avoid misunderstandings, engagement letters should list the state and local income tax returns to be prepared and whether the engagement includes other, non-income-based taxes (excise, franchise, sales and use tax, etc.) that may be due. Letters should specifically list which state returns and form numbers are included in an engagement rather than just say "all required state returns." Likewise, an engagement letter should specify responsibility for determining filing requirements for non-U.S. returns and, unless specifically agreed to, state that foreign filing obligations are not within the scope of the engagement. Specifically mentioning other services that are not included can be an effective way to limit misunderstandings and subsequent claims, particularly if such services have been provided to a client as part of a previous engagement.

With respect to limiting claims, a well-drafted terms-and-conditions addendum to an engagement letter can help to clarify additional responsibilities of the client, such as classification of workers...