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TAX PRACTICE RESPONSIBILITIES
Best practices for
engagement letters, POAs,
and tax return extensions
Editor: Provide clarity and avoid believe you are handling their taxes but
Stephen P. Valenti, CPA scope creep with a carefully do not understand exactly what that
drafted engagement letter might entail or encompass. A clearly
Authors: This discussion focuses on how and why defined engagement letter sets out the
Pamela Slatten, J.D. to use engagement letters and what they scope of services, defining what the
Larry Marietta, CPA should cover. The primary purpose of practitioner has agreed to do, what the
using a letter to define a professional re- client has agreed to do, and what the
lationship is to ensure that the client and practitioner will not be doing. Addition-
the practitioner agree upon the services ally, malpractice insurance premiums
that are to be provided. Treasury Circu- may be increased without the consistent
Engagement letters lar 230, Regulations Governing Practice use of engagement letters.
are best when they Before the Internal Revenue Service (31 The importance of being specific
are specific rather C.F.R. Part 10), Section 10.33, Best The benefits of engagement letters
Practices for Tax Advisors, states that a
than vague and practitioner should communicate clearly are often limited by vagueness and
address a broad with the client regarding the terms of the omission of useful provisions. For
the engagement; a signed engagement
instance, tax forms should be listed
array of issues that letter provides clarity and prevents specifically, rather than using a general
could conceivably scope creep. phrase like “all income tax returns” or
An engagement letter is also a valu-
“all state tax returns” and should patently
arise; practitioners able tool for cementing the relationship exclude all returns and forms not listed.
must consider key with a new client, particularly when For instance, specifically mentioning and
differences between there is a delay between accepting a new excluding any foreign reporting require-
ments such as the FinCEN Form 114,
client and beginning services. Further-
Form 8821 and Form more, defining the scope and agreeing Report of Foreign Bank and Financial
2848 before deciding upon the terms in writing clarifies the Accounts (FBAR), is prudent, considering
client’s expectations and builds trust by
the potential for significant penalties.
which one to obtain preventing the billing of services that Tax planning and consulting should
from a client; carefully were not anticipated by the client. It also be excluded from engagements that are
weigh the benefits removes any ambiguity regarding who merely for tax return preparation and
the client is, especially when the practi-
should ideally be dealt with under a
and pitfalls of filing tioner is dealing with a representative of separate engagement letter with clearly
tax return extensions. a business. defined parameters. Clients can become
upset when they discover that they have
In addition, clarifying the services
through an engagement letter acts as missed a tax-saving opportunity, regard- PHOTO BY SVCAN/ISTOCK
a primary defense against malpractice less of whether they were paying for
claims. Disagreements arise when clients proactive tax advice. Clients’ expectations
46 February 2022 The Tax Adviser
