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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:

1. 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.
2. 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.
3. 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.