3 ways engagement letters are being used for taxes

Tax season for accountants can be a super stressful and compact time to get information from clients, prepare the tax return, and get it filed by the deadline. Given that compression, some tax accountants will skip one of the most important steps in working with clients: the engagement letter. In fact, when we polled tax accountants, we found that almost a third of respondents never use an engagement letter with their clients.

The engagement letter is one of the most important client engagement tools you have, and can set your relationship with your client on a firm foundation that benefits you and the client. Here are three reasons why engagements can be used to make tax engagements more successful.

#1: Engagement letters provide clarity

Before starting any work, having your client sign an engagement letter can provide necessary information to save you time, money, and stress during tax season. A good engagement letter will provide your client with clarity as to how you will work with them, and eliminate questions or misunderstandings.

Engagement letters should have a detailed scope of services that list exactly what you will do for that client. This should not be ambiguous. For example, instead of “we will provide tax services,” you would say “we will prepare and e-file federal and state 1040 tax returns.” This provides clarity to your client, so that there is no confusion later about what you are supposed to be doing. When using ambiguous terms such as “tax services,” clients may assume tax services include asking you questions throughout the year, while you may mean something entirely different.

Having a detailed scope of services will also reduce scope creep and out-of-scope services. When your scope of services is detailed and clear, it will be easy to point back to the engagement letter when your client is asking for work outside that scope. For example, if my detailed scope of work includes having one tax planning session during the year, but then my client asks for a second one, I can easily go back to the engagement letter to state our original scope only includes one session. I would tell the client that I would be happy to send over a new engagement letter to provide an additional session for $300. This shows your client that you are honoring the original engagement letter, and lets them know the price for this additional service before you jump into it.

Engagement letters should also state your prices and when you will be paid for your services. You might state that the price of preparing and filing the tax return is $500, and that price will be paid half up front and the other half just prior to filing the return. This makes it clear what they will pay and when they will pay it in order to avoid questions about your invoices later. 

#2: Engagement letters set expectations

Two of the biggest frustrations that tax accountants have is when the client does not provide information on a timely basis and waits until the last minute to get the return done. Engagement letters can help solve this problem by setting expectations up front. For example, you might say that in order to file the 1120S tax return by March 15, the client should provide all necessary information to you by Feb. 15; otherwise, you will file an extension and the return won’t be completed until after May 1. This gives your client notice of that expectation, so if they call to complain that they want their return filed on March 15 – and you didn’t receive their information until March 10 – you can kindly point them to the engagement letter they signed that set forth this expectation.

Another expectation you can put in your engagement letter is that the client is responsible for their own bookkeeping, and that if they provide incomplete accounting records, you will either charge them extra for completing their bookkeeping, or they will be extended and work will not commence until they provide complete accounting records.

#3: Engagement letters reduce risk

One of the main purposes of an engagement letter is to reduce risk. When an engagement goes south, one of the first questions asked by an investigator or insurance agent is whether an engagement letter is in place. An engagement letter includes terms and conditions that may seem like a lot of legalese, but they are there for the protection and benefit of you and your client. If there were a dispute later on, you can go back to the engagement letter to review how to remedy that dispute or handle that situation. The engagement letter also may have provisions in place if you need to disengage from the client for issues that arise, such as what happens if the client does not pay you. While this may seem unnecessary, it can help in those rare occasions where problems come about and may need to be adjudicated. 

Follow best practices

Having engagement letters in place upon the commencement of services is a good best practice to follow in your firm. The engagement letter will provide clarity with your client, set expectations, and reduce your risk in serving the client. While it may seem like more work for you, this will save you time, money, and stress.

With Practice Ignition, we can reduce the amount of time it takes to handle your engagement letters and ensure you have one in place each time you engage with a client. For more information, visit the Ignition parter page.

Editor’s note: This article was originally published by Practice Ignition.