Tax Engagement Letters: Use of This Important Practice Tool Can Minimize Professional Liability Risk, Reduce Confusion, Improve Collections, and Ensure Clients Have a Good Understanding of the Practitioner's Role
Although tax engagement letters are often the topic of discussion in professional journals and presentations, in many situations CPAs neglect to use this tax management tool. As a result, the importance of reviewing this method to reach an understanding with clients is always relevant. Every CPA (and client) needs to know what is expected of both parties in a professional engagement. CPAs are frequently reminded by their malpractice carriers to issue engagement letters and request that their clients read them and indicate they understand and accept their terms. In professional liability litigation, the first question the defense attorney asks is usually, "Did you have an engagement letter?"To help reduce malpractice claims, many professional liability insurance carriers present free risk management seminars, and some offer premium discounts for clients who attend. Most of these seminars specifically cover tax services engagement letters. This article examines whether engagement letters are contracts. In addition, it addresses some common criteria that should be considered and terms that should be included in most engagement letters. CONTRACTUAL STATUS OF ENGAGEMENT LETTERS An "engagement letter" is not a "contract"--or is it? An engagement letter can form a basis for an enforceable contract (see "Engagement Letters for the Individual Tax Practitioner, Jan. 2014, page 32). However, even if a court concludes that the engagement letter is a contract, only certain terms may become the subject of a malpractice suit. In the cases cited below {Apple Bankfor Savings v. PricewaterhouseCoopers, 18 Mise. 3d 1137(A) (N.Y. Sup. Ct. 2008), rev'd, 895 N.Y.S.2d 361 (N.Y. App. Div. 2010), and Tayebi v. KPMG, 18 Misc. 3d 1139(A) (N.Y. Sup. Ct. 2008)), the engagement letters were examined to determine whether New York state's statute of limitation on malpractice claims had expired. These rulings reinforce the importance of careful wording delineating the period for which the services are being rendered as well as the importance of having an attorney review the engagement letter template. Regardless of whether engagement letters are contracts, they serve the important function of communicating with the client, from the accountant's perspective, the professional work to be performed, the terms and conditions of performing that work, any limitations on that work, and what the accountant expects from the client, including the terms and conditions for payment. The engagement letter can also promote services related to the subject matter that are beyond the scope of the engagement and for which the accountant has not in fact been engaged. Mentioning other services that are available strongly implies that these services are not a part of the present engagement as the CPA understands it. A provision excluding all other services except those specifically described should effectively limit the scope of services. The need to solicit the client's understanding of, and agreement to, the terms of an engagement letter cannot be overemphasized. All concerned parties should understand each party's expectation of who is responsible to complete the task at hand. All aspects should be included. If a formal tax engagement proposal was submitted to the client, the specific obligations usually have already been stated, and the engagement letter operates as an acceptance, with any changes noted, to the terms of the proposal. For this reason, the terms presented in the formal proposal should be reviewed in conjunction with the drafting of the tax engagement letter to reduce any potential misunderstandings. While a proposal can be promotional, such as discussing how competent the CPA is, how timely the CPA's services are, and other laudatory ideas, the engagement letter should stick to objective criteria. These promotional claims may be useful marketing tools during the engagement proposal process, but they should not be part of or a substitute for an engagement letter. …