A contractor likely won’t start your home renovation project without a signed contract on file. CPAs should approach their client relationships in much the same way — with engagement letters.
Engagement letters are contractual agreements between you and your clients. Each engagement letter details the scope of services to be provided, relationship duration, and, sometimes, prices or rates.
As you prepare for the upcoming tax season, don’t fail to send engagement letters to your clients. Engagement letters are important tools that establish boundaries of the working relationship, manage expectations, and are often helpful in resolving disputes.
Best practices for engagement letters
An engagement letter is an extensive, detailed legal document tailored to each client and their needs. As part of the AICPA® Tax Section’s Annual Tax Compliance Kit, you can find templates for more than 15 engagement letter types underwritten by CNA, the endorsed underwriter of the AICPA® Professional Liability Insurance Program.
There are templates for every kind of tax return — individual, partnership, S corporation, estate, and more — and other letters for engagements like consulting or projections. Prior to using these templates in your practice, review them with your legal counsel.
It’s best practice to issue a new engagement letter every year; starting any work prior to receiving a signed engagement letter is not advised. If the scope of work changes, present an addendum or a revised letter.
Revisions to tax laws could also affect these service agreements. For example, as of Jan. 1, 2024, many U.S. companies are required to report information on their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This task was not included in a prior-year engagement letter; if a client needs you to provide this service, you’ll want to update the contract accordingly.
If you currently have clients who did not sign engagement letters prior to establishing a working relationship, it may be time to have them start signing these important documents.
Manage expectations and resolve disputes
Like other contracts, engagement letters help manage expectations. Even if a client is asking for an additional one-time task that they perceive as standard and easy, it’s your job as the CPA to retain that boundary. Any additional task not cited in the engagement letter is an expansion of service and will require contract modifications.
Engagement letters also help when a CPA firm is faced with professional liability claims. According to CNA Risk Control Consulting Director Deb Rood, CPA, MST, tax services accounted for 77% of the claims asserted against CPA firms in AICPA’s Professional Liability Insurance Program in 2024. Should you find yourself sued for malpractice, an engagement letter is a helpful defensive tool.
Fortify with terms and conditions
An engagement letter is often paired with a standard terms and conditions addendum. The addendum includes additional helpful details like billing and payment terms, provisions for professional termination or withdrawal, proprietary information, conflicts of interest, records management, and dispute resolution.
This addendum bolsters any engagement letter and creates a singular understanding of the contract agreement. Moreover, it is useful in establishing consistent practices across a firm.
Tax season starts with engagement letters
Both you and your clients benefit from engagement letters. By detailing your business relationship and the types of services agreed upon with your clients, you can easily manage the expectations of all involved.
Head into the upcoming tax season confidently. Besides more than 15 templates for engagement letters, the AICPA Tax Section’s Annual Tax Compliance Kit has client organizers, tax return checklists, practice guides, and other resources to help you manage your tax season workflow — all available to Tax Section members.
Download the C corporation tax return checklist to sample what the Annual Tax Compliance Kit has to offer. Not a member? Join the AICPA Tax Section today to access invaluable resources like the compliance kit.