Three ways engagement letters are being used for taxes

Tax season for accountants can be a super stressful and compact time of needing to get information from clients and turning around to prepare the tax return and getting it filed by the deadlines.

Given that compression, some tax accountants will skip one of the most important steps in working with clients - the engagement letter. In fact, when we poll tax accountants, we find that almost a third of tax accountants never use an engagement letter with their clients. The engagement letter is one of the most important client engagement tools that you have and can set your relationship with your client on a firm foundation that benefits both you and the client.

Here are three reasons why engagements can be used to make tax engagements more successful.

1. Engagement letters provide clarity

Before starting any work for a client, having your client sign an engagement letter can provide necessary information that can save you time, money and stress later on during tax season. A good engagement letter will provide your client with clarity as to how you will work with them and strive to eliminate questions or misunderstandings that can happen.

Engagement letters should have a detailed scope of services that list exactly what you will do for that client. This should not be ambiguous, like “we will provide tax services,” but instead would state “we will prepare and e-file the federal and state 1040 tax returns.”

This provides clarity to your client so there is no confusion later on about what you are supposed to be doing or not doing. When using ambiguous terms like “tax services,” clients may assume tax services include asking you questions throughout the year, and you may mean something entirely different.

Having a detailed scope of services will also reduce scope creep and out of scope services. When your scope of services is detailed and clear, it will be easy to point back to the engagement letter when your client is asking for work outside of that scope.

For example, if my detailed scope of work includes having one tax planning session during the year, but then my client asks for a second one, I can easily go back to the engagement letter to state, “Our original scope only includes one session, but I would be happy to send over a new engagement letter to provide you with this additional session at the cost of $300.” This shows your client that you are honoring the original engagement letter and lets them know the price for this additional service before you jump into it.

Engagement letters should also state your prices and when you will be paid for your services. For example, you might state that the price of preparing and filing the tax return is $500, and that price will be paid half up front and the other half just prior to filing the return. This makes it clear to your client what they will pay, when they will pay it and avoid questions about your invoices later.

2. Engagement letters set expectations

One of the biggest frustrations tax accountants have with their clients is when they don’t provide information to them on a timely basis and wait until the last minute to get the return done.

Engagement letters can help solve this problem by setting expectations upfront. For example, you might say that to file the 1120-S tax return by March 15, the client should provide all necessary information to you by Feb. 15, otherwise, you will file an extension and the return won’t be completed until after May 1.

This gives your client notice of that expectation and if they call to complain that they want their return filed on March 15, when they got you their information on March 10, you can kindly point them to the engagement letter they signed that set forth this expectation. Another expectation you can put in your engagement letter can be that they are responsible for their own bookkeeping and that if they provide incomplete accounting records that either you will charge them extra for completing their bookkeeping or that they will be extended, and work will not commence until they do provide complete accounting records.

3. Engagement letters reduce risk

One of the main purposes of an engagement letter is to reduce risk for the accountant. When issues arise, one of the first questions that gets asked by an investigator or insurance agent is if an engagement letter is in place.

An engagement letter includes terms and conditions that may seem like a lot of legalese, but are there for the protection and benefit of you and your client. If there were a dispute later on, you can go back to the engagement letter to review how to remedy that dispute or handle that situation.

The engagement letter has provisions in place if you need to disengage from the client for issues that arise or what happens if the client does not pay you. While this may seem unnecessary, it can help in those rare occasions where problems arise and may need to be adjudicated.

Having engagement letters in place upon the commencement of services is a good best practice to follow in your firm. The engagement letter will provide clarity with your client, set expectations and reduce your risk in serving the client. While it may seem like more work for you, this will save you time, money and stress in the long term.

With Practice Ignition, we can reduce the amount of time it takes to handle your engagement letters and ensure you have one in place each time you engage with a client.