In a tax preparation business, an engagement letter communicates, from the tax preparer's perspective, the work the preparer will do as well as what they won't do and the terms and conditions of performing that work. It also communicates what the preparer expects from the client, establishes how payment is to be made, and defines what to expect if the parties decide to end the relationship. This letter is also known as a client service agreement.
The engagement letter is a document that is highly customized, reflecting your personality and your business. As such, TaxSlayer Pro does not provide a generic letter or template in the program, nor a way to include it in the program. The engagement letter is a document you provide to clients before working on their tax return, therefore it isn't included in the tax return.
For an engagement letter to work it must contain the right content elements. Here are the common items to consider including in an engagement letter.
Scope of Services
All engagement letters should have a precise definition of the work to be done, such as the specific tax returns, both federal and state, that are the subject matter of the engagement. The scope should include the time period covered and a provision that the services will not be commenced until an executed engagement letter is in hand. The engagement letter should be sufficiently clear as to the tax returns covered to prevent future misunderstandings, and it should include deadlines for both parties. It should also define what constitutes the tax professional’s completion of the engagement, such as the tax return's acceptance by the IRS.
The tax preparer should detail the specific responsibilities as set forth in Circular 230 that the paid preparer will use to uphold the accuracy of the tax return and the recordkeeping that is required. This provision should inform the taxpayer of the preparer’s obligation to make reasonable inquiry and the reason for the client to cooperate.
In this section, the letter should define what the client must provide in terms of information, documents, and activities and by what date. This provision should state that client documents and statements will be assumed to be correct and the tax professional is not accountable for client mistakes or omissions.
The tax professional should define the activities or outcomes that are and are not included in the engagement. For example, amending a tax return to correct an omission by the preparer would probably be considered included in the original engagement, but amending the return to correct an omission by the taxpayer to provide a source document or otherwise disclose transactions would fall outside the original engagement and require an additional fee.
Fees and Terms of Payment
One of the most critical benefits of having an engagement letter is outlining the financial arrangements, including fees, payment due dates, late penalties, and stop-work provisions for non-payment. Here, the tax professional can define what is and is not included in the fee.
Record Retention Policy
This section specifies the tax office’s policy regarding providing copies of prior year tax returns and documents to taxpayers and any fees associated with providing these services, if any.
The final section of any engagement letter defines the process for either party to terminate the arrangement, in other words specifying what the tax office will and will not do in the event the relationship ends.
Circular 230, Regulations Governing Practice before the Internal Revenue Service