Writing Engagement Letters: Tips for Tax Preparers

A tax preparer composes an engagement letter on her computer

Does your tax practice use engagement letters for each and every client? If not, it’s probably time to start. Here’s what every tax preparer should know about engagement letters:

What is an engagement letter?

An engagement letter acts a bit like a contract between you and your clients. It lays out the exact work that you will do, how much they can expect to be charged, and the documents and other information the clients should provide to you. 

It also lays out what you are not responsible for, such as information clients willingly withheld from you or work from previous tax years.

What is the purpose of an engagement letter?

An engagement letter serves multiple functions for both you and your client. First and foremost, it clearly defines the work that you will do for your client and the fees that you charge for such work. Engagement letters will often offer other details if you must do additional work outside of the initial scope defined. For example, if a business client provides incomplete books and you need to do additional work and find documentation to set everything in order, your engagement letter should define what additional fees or delays a client should expect.

Secondly, an engagement letter is an important protection against malpractice lawsuits. Professional liability insurance providers recommend that tax preparers use a thorough and carefully worded engagement letter in order to protect themselves from litigation.

For more information on protecting yourself from litigation, see our guide to professional liability insurance for tax preparers.

What should be included in an engagement letter?

Consider including all of the following in your engagement letter:

Litigation Protection

These items and clauses help protect you from being sued for professional malpractice.

  • An exclusion clause – Defines the work and information that you are not responsible for.
  • Hold-harmless/ indemnification clauses
  • Alternative dispute resolution – In the event of a dispute, these lay out alternative ways of settling the dispute outside of a courtroom.

Scope of Work

Your engagement letter should define the work you will do, the work you are not responsible for, and what happens if you must do additional work to properly prepare your client’s taxes. 

Client’s Responsibilities

Your engagement letter should also define the documentation the client should provide, the deadlines for providing it, and what happens if they fail to provide the information within said deadlines.

Yearly updates

Remember to keep all information in your engagement letters relevant to the current tax year and make any necessary revisions as tax laws change.

Customized information for each client

Starting out with a template is helpful, but engagement letters are the most effective when they are customized for each client. If there are tax laws specific to a client’s industry or financial situation, the engagement letter should reflect those situations.