In today’s business environment, professionals need to use engagement letters. The largest national chain of tax professionals has each client sign a “client service agreement” at the start of a tax preparation meeting. It’s prudent. If your practice is at least at their level of complexity, you need to do the same. And if something is not in writing – well it did not occur!
I believe there are actually 17 clauses specific to the income tax preparation/representation industry which MUST appear in your engagement letter to protect you and your practice. These 17 clauses are in addition to the other required elements of a legally binding contract. An attorney can help make the agreement binding - but does your attorney understand your business well enough to put all the protections into the agreement? Your practice might be your single most valuable asset. You need to protect it.
Here are three of the 17 clauses:
1. An exclusion clause: Section 10.32 of Circular 230 suggests that you must communicate “clearly with the client regarding the terms of the engagement”. You should be clear to indicate both what you are, and what you are not, planning to do for the client in this engagement. Here is the clause from my 2014 engagement letter:
The engagement does not include any services not specifically stated in this letter. However, we would be pleased to consult with you regarding other income tax matters, such as proposed or completed transactions, income tax projections, and for research in connection with such matters. Tax advice cannot be provided without a request in writing. We will render additional invoices for such services at our standard billing rates.
2. Location: My practice services clients all over the world. You might, too. If not, I bet you have clients from outside of the town where your office is. How about outside of your State? Sure you do. Even if you don’t, what if a client moves out of state, and then discovers an error?
What if you were sued in small claims court in another State? You would simply not show up, right? Your engagement letter needs to state where a lawsuit can occur. The answer, too, is in your town, your county, and your State. Absent this clause in the agreement, you risk needing to defend yourself someplace else, at an additional cost. The legalese of this clause has grown, but the most important line you need is:
Any ensuing litigation shall be conducted within the County of Orange, State of New York, according to New York State law.
3. End of the engagement: When can you ‘put the pencil down’ ? When does your liability end? Absent an agreement, courts have held that tax professionals liable long after the tax return was filed. Here is the clause in my 2014 agreement:
Our engagement will be satisfied upon delivery of the completed returns to the company. Therefore, the company will be solely responsible for filing the returns with the appropriate taxing authorities.
You can learn about the other 14 recommended engagement letter clauses plus best practices during the Engagement Letters session at Tax Practice Boot Camp.