Question: Mary and Lina, both tax preparers and CPAs, disagree on whether a tax pro must have a signed engagement letter from their client. Is the letter mandatory?
Answer: A signed engagement letter is not mandatory, but it is highly recommended because it clarifies three important aspects of the client relationship:
- The job. An engagement letter clearly communicates the job details to the client. It describes the professional work to be performed, and a description of work that is not included. For instance, for multi-state situations, mentioning the need for a client’s approval before preparing a state’s return puts the risk of non-compliance on the client in the event of an audit.
- Fees. The letter explains fees, with a formula or method of computing the fee that is easily understandable to avoid unpleasant surprises. Estimating charges up front with an agreement to discuss or negotiate changes helps clients feel they are being treated fairly.
- Liability. As an enforceable contract, the letter provides your insurance carrier with some limits on claims for procedural errors or missed elections. If the letter specifies that the S corporation election is to be handled by the client, and it’s never filed, having that information in the letter clarifies potential liability.
A good letter should contain six elements: The identity of the client (is it an entity or individual?), the period covered, expected client responsibilities, reliance on client records and assurances, the scope of services and the fee arrangements.
A signature signifies acceptance by the client, so be sure to have them signed.
About National Association of Tax ProfessionalsThe National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.
The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.