Kicking off tax season with engagement letters and organizers

By Ami Oppe, CPA, CGMA, and J. Raleigh Cutrer, CPA/ABV/PFS

Editor: Michael W. Crisler, CPA

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);
  • Shareholder or partner/LLC basis schedules;
  • Federal excise tax forms;
  • Determining state and local tax filing requirements, including income, franchise, sales and use, and excise taxes;
  • Any procedures designed to discover errors or other irregularities;
  • Tax planning and other business consultation; and
  • Corresponding with taxing authorities about any proposed adjustments to the returns prepared.

Reliance on client and other third party recordsClients should understand that the accuracy of accounting records is their responsibility and that tax preparers rely on these records. In addition, the firm should also consider noting to clients that it relies on the accuracy of third-party records such as the gain/loss on investment transactions.

Fee arrangements: The engagement letter should clearly outline how the fee is determined. Many fee structures can be employed, such as a fixed fee, hourly charges, charge per tax form, or a retainer. Fixed-fee arrangements are becoming more mainstream, as work can vary from client to client. However, it is vital to communicate that additional fees may be charged when the scope of the engagement is significantly different from what was originally agreed upon in the engagement letter.

Client acceptance: As a standard operating procedure, a signed engagement letter should be received and added to the client file before the engagement is started. If the engagement letter has not been returned when the client's tax documents are received, the client should be notified immediately and informed that the letter must be signed before the engagement can begin.

In addition, the firm should consider having an office policy that when it prepares a return for a married couple, both spouses must sign the engagement letter, since the firm is representing them jointly and individually.

Date tax information is due into the office: Many tax firms use a cutoff deadline by which clients must deliver all of the tax information to their office to guarantee delivery of an accurate tax return in a timely manner by its intended due date. This cutoff deadline should be clearly communicated in the engagement letter. In addition, the firm should indicate the office policy for any client who fails to deliver sufficient information by that date (such as automatically requesting an extension of time to file the return, even if the firm has not heard from the client, or only requesting an extension if the firm has been engaged to do so by the client).

Delivery of the return: The delivery mechanism of the tax return could be communicated in the engagement letter if there is a default option, or the option could be provided in a checkbox format. Some options to consider (depending on the constraints of the software used) are a printed return, a secure client portal, or an email of an encrypted version of the tax return.

Tax organizers

For many firms, the tax organizer is the basis of their due-diligence documentation for tax returns. It helps firms and their clients organize tax information in an orderly fashion. It becomes an important piece of the overall package that makes sure all the relevant information has been considered to prepare a complete and accurate tax return.

Most tax software comes with a standard organizer the firm can mail to individual tax return clients. However, it may benefit a firm to consider making changes beyond the standard. As part of its annual compliance kit, the AICPA makes available to its Tax Section members sample organizers for individuals, as well as many types of other entities, that they may find helpful when reviewing their current tax organizer. Many tax research services also offer sample tax organizers.

Some items a firm should consider before sending out organizers this year are:

Standard vs. customized: While the standard organizer may be sufficient, taking time to customize it can be worthwhile. Several areas could be considered for customization.

Most organizers have multiple pages dedicated to updating contact information that includes a variety of other information on those pages, as well. This amount of information can be overwhelming to the client and can lead to the client's not filling it out. So, consider adding a page at the very front of the organizer that includes only contact information, with a section for updating it.

Usually, the firm's software will have a standard questionnaire that comes loaded in the organizer that the software allows the firm to change. The firm can use this area to ask questions and/or provide additional tax information that is important to the client. Some examples of customization would be:

  • Several areas of tax law require specific documentation to allow a deduction on a tax return, such as charitable contributions; travel, meals, and entertainment; and business use of a vehicle. The firm could include a question in its organizer asking clients whether they have met the substantiation requirements for each particular deduction and list the substantiation requirements below the question. The firm will have increased its due-diligence documentation for the return and informed the client of those requirements so the question can be answered competently.
  • The IRS requires preparers to complete Form 8867, Paid Preparer's Due Diligence Checklist, for certain credits. This form basically requires the preparer to interview taxpayers to make sure they meet the requirements to take the credit and to document their answers in writing. Preparers can be subject to penalties if they have not complied with due-diligence requirements for all credits claimed. The questionnaire in the organizer is a great place to ask these questions and have the answers documented.
  • Often, the organizer may be the main source of communication with a client each year. The firm could consider adding an optional section of the questionnaire that asks about non-tax-return-related advice that the firm would typically give when consulting with a client in person. Items such as estate planning, retirement savings, insurance coverage, etc., are all topics that could be included in this section of the questionnaire. The answers provided by the client could be used as a springboard to follow up with a consultation appointment after the tax return is completed.
  • The questionnaire is designed to make sure the firm and the client do not miss anything, so it asks a lot of questions. Many of these questions turn out not to apply to a particular client, especially one with a simple tax return. The firm could consider having a shorter questionnaire for certain clients. Examples could include dependents, retired taxpayers, taxpayers who use the standard deduction, those with a preparer fee under a certain threshold, etc.
  • Usually the questionnaire only addresses issues related to the federal tax return. However, the firm may need to ask about specific state tax issues annually. The firm could customize its questionnaire to include these questions instead of relying on the client to find the one page buried in the organizer that deals with the state-specific issues.
  • The questionnaire is also a great place to first pose some procedural questions that usually need to be asked when the return is complete: where to deliver the tax return, whether additional copies are needed for a third party such as a bank, what method of refund or payment is preferred, etc.

Organizers for entities: While it may be standard to send organizers to individual tax return clients, it is less common practice to send them to corporate, partnership, and trust or estate clients. This may be because the concept of entity organizers is just catching on with tax software companies. Creating an organizer that includes questions that the firm does (or should) ask its clients every year is a great way to ensure completion of due diligence as it relates to tax return preparation.

Delivery of the organizer: With the ever-increasing focus on paperless systems, many tax software companies have developed systems to deliver organizers to clients electronically. This leaves tax firms with a variety of choices for organizer delivery: paper (traditional mail), email of a PDF file, a PDF delivered to a client portal, or an electronic organizer. All the options have advantages and disadvantages. While some clients may respond favorably to one method, other clients may prefer another. A firm may consider a policy of having a default method of delivery and then, as an exception, provide a different method based on a client's request. Tax software companies make continuous improvements in their software. Recent enhancements allow firms to offer clients a variety of choices for how they receive an organizer. This provides clients with the impression that they are more than just a "client number" in the system and that the firm cares about their desires. Hopefully, it also increases the rate of completion of the organizer and its return to the firm.

Office policy for returning it: One thing many firms seem to struggle with is getting clients to return a completed organizer. It is important to have an office policy that the firm can stick to regarding whether it requires all, some, or none of the organizer to be returned to its office as part of tax preparer due diligence. Communicating this policy to the client is key to prompting the return of the completed organizer. The firm should figure out the best way to explain to each client that completing the organizer and returning it to the firm's office benefits the client (for example, by noting that the tax return is more likely to be complete, correct, and well-documented).

A policy one of the authors' firms has put in place that has increased the return of the organizer is to split the organizer into two sections—one required and the other optional. This helps clients focus on the part of the organizer the firm cares most about and does not overwhelm them with the parts that are not as important.

The right tool for the job

These considerations merely serve as guidelines to help the firm through a process of reviewing its current policies for tax engagement letters and tax organizers. As the firm considers making any of these changes or implementing any new policies/procedures, it is important that it keep in mind the firm's culture, the constraints of its software, and the personality of its clients. The engagement letter and organizer should be considered tools for the overall success of a tax practice, not a problem to be dealt with on an annual basis. Therefore, a firm should use them to best fit the needs of its clients and the business.   



Ami Oppe is a tax manager with Walsh, Kelliher & Sharp in Fairbanks, Alaska. J. Raleigh Cutrer is a shareholder with Matthews, Cutrer & Lindsay in Ridgeland, Miss. Michael W. Crisler is a member and the chief manager of Crisler CPA PLLC in Hendersonville, Tenn. Mr. Crisler is the chair, Ms. Oppe is the vice chair, and Mr. Cutrer is a member of the AICPA Tax Practice Management Committee. For more information about this column, contact


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