SAMPLE ENGAGEMENT LETTERS
WHY WE NEED TAX ENGAGEMENT LETTERS
Why we need engagement letters
Accounting firms of all sizes continue to be subject to claims and lawsuits arising from tax services. More than two-thirds of professional liability claims in the AICPA Professional Liability Insurance Program arise from client allegations of professional lapses in tax practice. In such disputes, your engagement letter could become a crucial controlling factor in determining the responsibilities of both parties.
A review of claims maintained over several years for the AICPA Professional Liability Insurance Program reveals that in over 40% of all claims, no engagement letter was issued.
5500 - QUALIFIED RETIREMENT PLAN RETURN ENGAGEMENT LETTER
CLIENT NAME
STREET ADDRESS
CITY, STATE ZIP
Subject: Preparation of Your Qualified Retirement Plan Tax Returns
Dear ADMINISTRATOR NAME:
Thank you for selecting (YOUR FIRM NAME) to assist you with tax compliance for the (NAME OF PLAN). This letter confirms the terms of our engagement for the plan year ended YEAR(0000) and clarifies the tax services we will provide. To indicate that the letter correctly states your understanding of our and mutual responsibilities, we ask you to confirm that by returning a signed copy.
We will prepare your YEAR(0000) Form 5500 (or other 5500 series form) from information you provide. We may need to ask you for clarification of some of the information, but we will not audit or otherwise verify the data you submit. We will provide checklists, questionnaires, and/or worksheets to help you efficiently gather information required for a complete return. Use of the forms will assure that pertinent information is not overlooked.
Your responsibilities include providing information required for preparation of a complete and accurate return. Documents and other data that support the Form 5500 filing may be needed to prove the accuracy and completeness of the returns to the IRS and/or Department of Labor should the return be selected for examination, so you should retain all original documents. Since you have final responsibility for the return, you should review it carefully before you sign it.
Our work in connection with preparation of your Form 5500 does not include procedures to verify your representations, or to discover defalcations or other irregularities, including the presence of “prohibited transactions.”
The law imposes substantial penalties on “prohibited transactions”. If you would like information about those penalties, or you would like us to include procedures to detect them should they be present, please call this officeus.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. We will apply the “more likely than not” reliance standard to resolve such issues in order to avoid penalties that might be assessed against us as return preparers. You agree to honor our decisions regarding disclosure of return positions to avoid or mitigate penalties.
Penalties of as much as $100,000 can be imposed on the plan for failing to disclose participation in “reportable transactions,” that is, certain arrangement the IRS has identified as potentially abusive. We will insist that all such transactions be properly disclosed.
Unless you instruct us otherwise, we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The Internal Revenue Service and/or the Department of Labor may select any Form 5500 for examination. Proposed corrective adjustments by an examining agent are subject to appeal. We can arrange to be available upon request to represent you in the event of such government examination. That service is not included in our engagement to prepare returns. We will prepare a separate engagement letter for it and render additional invoices for fees and expenses incurred.
Our fee for preparing the returns discussed above will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent allowed by state law, an interest charge will be added to all accounts not paid within thirty (30) days.
We retain copies of the records you supply to us along with our work papers for your engagement for seven years. After seven years, our work papers and engagement files are destroyed. All of your original records will be returned to you at the end of this engagement, and you should store them securely.
This engagement letter relates only to the plan(s) specified above. Please notify us if you have additional employee benefit plans that require our attention.
To affirm indicate that the contents of this letter describe your understanding of the service we are to provide, please sign the enclosed copy in the space indicated and return it to us in the envelope provided.
If there are other projects you would like to discuss, or if you have comments you wish to call to our attention, please note those just below your signature.
We appreciate your confidence in our firm.
Sincerely,
YOUR FIRM NAME
_________________________
ACCOUNTANT IN CHARGE
Accepted By: _______________________________________
Title _______________________________________
Date: _______________________________________
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Date:
Introducing Engagement Letters to Clients
Proper communication of your firm’s risk management program is important. Although other accounting firms may have used engagement letters for years, introducing them in your practice may be new to many clients and will require some advance preparation.
Be prepared to explain to the client why an engagement letter is required. Make the explanation from the client’s perspective to help build understanding of the change. An engagement letter:
• Defines the services the accountant is being engaged to perform;
• Identifies engagement responsibilities of both the accountant and the client;
• Explains fees, billing, and payment terms; and
• Assures the client that additional services will not be initiated without advance approval
You may wish to emphasize that engagement letters will be required of all clients.
Some accountants also mention “insurance requirements” when introducing engagement letters into a client relationship for the first time.
It is best for the accountant in charge of a client relationship to discuss the contents of an engagement letter with the client before its delivery for signature. That allows time for review and consideration of the scope of the engagement, any agreed upon limitations, client responsibilities, engagement staffing and time considerations, billing and payment terms, and other relevant matters before the letter is finalized.
Policy
Your Company’s policy should be to use engagement letters for all tax return engagements, all audits by taxing authorities, and all tax consulting engagements.
TAX ENGAGEMENT LETTER EXAMPLES
Here are examples of letters you can use to document the terms of an engagement for:
▪ Estate Tax Return (Form 706)
▪ Individual Income Tax Return (Form 1040)
▪ Income Tax Return for Estate or Trust (Form 1041)
▪ Income Tax Return for Partnership/LLP/LLC (Form 1065)
▪ Corporation Income Tax Return (Form 1120)
▪ S Corporation Income Tax Return (Form 1120S)
▪ Qualified Retirement Plan Return (Form 5500)
▪ Examination of Returns
▪ Tax Advice protected by Confidentiality Privilege
We also have included several optional paragraphs that you might use instead of paragraphs in the examples, or to provide additional information. Optional paragraphs discuss:
substantial understatement penalty disclosures,
disclosure of reportable transactions
limiting the scope of the engagement,
client records,
use of an outside processing service,
outside disclosure for peer review programs,
finance charges,
the negligence penalty, and
electronic filing.
We recommend use of engagement letters for all tax services. In order to assure that their content is appropriate, you should review them carefully and modify them for your use. Be sure to consider the following:
Treasury Circular 230, Standards of Practice
AICPA Statements on Standards for Tax Services,
State law relating to disclosure of finance charges,
State Board of Accountancy rules regarding disclosure of outside processing,
Value of signed confirmation of arrangements when dealing with complex matters, and
Need for separate engagement letter, or separate language, for separate services (such as providing privileged tax advice, or preparing certain state returns).
These letters serve as examples. Please read them carefully and consider the engagement you are attempting to document. Engagement letters can and should be tailored to the specific circumstances of each engagement. A “canned” engagement letter might be more dangerous than none at all.
Before introducing engagement letters into your tax practice, we urge you to consult your attorney, or discuss the matter with your professional liability insurer. They may have important information that will affect how you use engagement letters and what your engagement letters must contain to comply with rules in your state.
706 - ESTATE AND INHERITANCE TAX RETURN ENGAGEMENT LETTER
Dear FIDUCUARY NAME:
Thank you for selecting (YOUR FIRM NAME) to assist you with tax compliance for the (NAME OF ESTATE). This letter confirms the terms of our engagement and clarifies the nature and extent of services we will provide. To assure mutual understanding of our responsibilities, please confirm arrangements for our services by signing and returning the enclosed copy of this letter.
We will prepare required federal and state estate and inheritance tax returns from information you furnish to us. While we may ask you for clarification of some of the information, we will not audit or otherwise verify any data you provide. We will provide checklists, questionnaires, and/or worksheets to help you secure the necessary information. Please use those forms to be sure important information is not overlooked.
It is your responsibility to provide information required for preparation of complete and accurate returns. You should keep all documents, appraisals, and other data that support the calculation of the gross estate and allowable deductions. Because taxing authorities frequently challenge values, and review documentation, assumptions, and calculations, they may be needed to prove the accuracy and completeness of the returns. You have final responsibility for the estate and inheritance tax returns and you should review them carefully before you sign them.
Our work in connection with preparation of the estate and inheritance tax returns will not include procedures to discover defalcations or other irregularities. Nor do we warrant the accuracy of any valuations or the appropriateness of values used in the preparation of the returns.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise, we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law includes penalties that may be imposed when taxpayers understate their tax liability. If you would like information about those penalties, please call this office
Your returns may be selected for review by the taxing authorities. Any proposed adjustments by an examining agent are subject to certain rights of appeal. In the event of such an examination, we can arrange to be available at your request to represent you. A separate engagement letter will be provided for such services. Our fee for return preparation does not include representing you in any examination or dispute with the taxing authorities.
Our fee for these services will be based upon the amount of time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent allowed by state law, an interest charge may be added to all accounts not paid within thirty (30) days.
We retain copies of the records you have supplied to us along with our work papers for your engagement for seven years. After seven years, our work papers and engagement files are destroyed. All original records will be returned to you when the returns are completed. You should keep the original records in secure storage.
To indicate that, this letter correctly summarizes your understanding of the arrangements for this work, please sign the enclosed copy of this letter in the space indicated and return it to us in the envelope provided.
Thank you for your confidence in our firm.
Sincerely,
YOUR FIRM NAME
___________________________
ACCOUNTANT IN CHARGE
Accepted By:
Date:
1040 - INDIVIDUAL TAX RETURN ENGAGEMENT LETTER
Dear CLIENT NAME:
Thank you for selecting (YOUR FIRM NAME) to assist you with your tax affairs. This letter confirms the terms of our engagement with you and the nature and extent of services we will provide.
We will prepare your (0000) federal and all state income tax returns you request using information you provide to us. WE may ask for clarification of some items, but we will not audit or otherwise verify the data you submit. We’ve enclosed an “Organizer” to help you gather the information required for a complete return. If you use the Organizer, it will help you avoid overlooking important information and contribute to efficient preparation of your returns. That helps keep the cost of our services as low as possible.
It is your responsibility to provide information required for preparation of complete and accurate returns. You should keep all documents, canceled checks and other data that support your reported income and deductions. They may be necessary to prove accuracy and completeness of the returns to a taxing authority. You are responsible for the returns, so you should review them carefully before you sign them.
Our work will not include any procedures to discover defalcations or other irregularities. The only accounting or analysis work we will do is that which is necessary for preparation of your income tax returns.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise, we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law imposes penalties when taxpayers understate their tax liability. If you have concerns about such penalties, please call us.
Your returns may be selected for audit by a taxing authority. Any proposed adjustments are subject to appeal. In the event of a tax examination, we can arrange to be available to represent you. Such representation will be a separate engagement for which an engagement letter will be provided to you. Fees and expenses for defending the returns will be invoiced in accordance with terms we agree on for that engagement.
Our fee for preparation of your tax returns will be based on the amount of time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent permitted by state law, an interest charge may be added to all accounts not paid within thirty (30) days.
We will retain copies of records you supplied to us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files will be destroyed. All of your original records will be returned to you at the end of this engagement. You should keep the original records in secure storage.
To indicate that this letter correctly summarizes your understanding of the arrangements for this work, please sign the enclosed copy of this letter in the space indicated and return it to us in the envelope provided.
We appreciate your confidence in us. Please call if you have questions.
Sincerely,
YOUR FIRM NAME
________________________
ACCOUNTANT IN CHARGE
(Both husband and wife must sign for preparation of joint returns)
Accepted By: (H) __
(W)___________________________________
Date: _______ __
1041 - FIDUCIARY (ESTATE OR TRUST) TAX RETURN ENGAGEMENT LETTER
Dear FIDUCIARY NAME:
Thank you for selecting (YOUR FIRM NAME) to assist you with tax compliance for (NAME OF TRUST OR ESTATE). This letter confirms the terms of our engagement for the year ended (0000) and explains the services we will provide. To assure mutual understanding of our responsibilities, we ask you to read this letter and confirm the arrangements by signing and returning a copy to us.
We will prepare the (0000) federal and requested state fiduciary income tax returns, including tax information for beneficiaries from information you provide. We may ask for clarification of some information, but we will not audit or otherwise verify the data you submit. We will provide checklists, questionnaires and/or worksheets to help you gather information necessary for a complete return. Please use those forms in order to avoid overlooking important information.
It is your responsibility to provide all information required for preparation of complete and accurate returns. Keep all documents, canceled checks and other data used to determine income and deductions. Those may be necessary to prove the accuracy and completeness of the returns to a taxing authority. Since you have the final responsibility for the fiduciary income tax returns, you should review them carefully before you sign them.
Our work will not include any procedures designed to discover defalcations or other irregularities. We may provide limited accounting and analysis, but only for the purpose of preparing complete and accurate income tax returns.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise, we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law includes penalties that may be imposed when taxpayers understate their tax liability. If you would like information about those penalties, please call this office
Your returns may be selected for review by the taxing authorities. Proposed adjustments by an examining agent are generally subject to appeal. Should a return we have prepared be selected for examination, we can arrange upon request to represent you. Such representation will be a separate engagement for return preparation. A separate engagement letter will be provided to document the arrangement including terms for payment of fees and expenses incurred.
Our fee for preparation of the subject returns will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent permitted by state law, an interest charge may be added to all accounts not paid within thirty (30) days
We keep copies of the records you have supplied us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files are destroyed. All of your original records will be returned to you at the end of this engagement. Our working papers and files are not a substitute for the original records, and you should keep them in a safe place.
To indicate that this letter correctly summarizes your understanding of the services we are to provide, please sign the enclosed copy in the space indicated and return it to us in the envelope provided.
Thank you for your confidence in us.
Sincerely,
YOUR FIRM NAME
__________________________
ACCOUNTANT IN CHARGE
Accepted By:
Date:
1065 – PARTNERSHIP or LLC TAX RETURN ENGAGEMENT LETTER
Dear TAX MATTERS PARTNER:
Thank you for selecting (YOUR FIRM NAME) to assist the (NAME OF PARTNERSHIP OR LLC) with tax compliance for (0000). The purpose of this letter is to confirm the terms of our engagement and the services we will provide. You received this letter because we understand you are the person responsible for the tax matters of the partnership. If that is not correct, please tell us who the tax matters partner is.
You are engaging us to prepare the above referenced tax returns from information you provide to us. We may ask for clarification of some information, but we will not audit or otherwise verify the data you submit. We will provide checklists, questionnaires and/or worksheets to help you gather information necessary for a complete return. Please use those forms in order to avoid overlooking important information.
Our work in connection with the preparation of income tax returns does not include any procedures designed to discover defalcations or other irregularities. We may provide limited accounting and analysis, but only for the purpose of preparing complete and accurate income tax returns.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law includes penalties that may be imposed when taxpayers understate their tax liability. If you would like information about those penalties, please call me. This is an entity whose tax items are reported in the returns of its partners or members; therefore, any penalty for substantial understatement of tax relating to this entity’s tax items would be imposed on its partners or members.
Management is responsible for proper recording of transactions in the accounts, safeguarding assets, and substantial accuracy of the financial records. Because you have final responsibility for the returns, you should review them carefully before you sign and file them and distribute tax information to the partners or members.
Your returns may be selected for review by the taxing authorities. Adjustments proposed by an examining agent are subject to appeal. We can arrange to be available, upon request, to represent you if your returns are audited. That representation will be a separate engagement and we will render additional invoices for fees and expenses incurred.
Our fee for preparation of the returns identified above will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent allowed by state law, an interest charge may be added to all accounts not paid within thirty (30) days
We retain copies of the records you have supplied us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files are destroyed. All of your original records will be returned to you at the end of this engagement. Our working papers and files are not a substitute for the original records, and you should keep them in secure storage.
If this letter reflects your understanding of the terms of our engagement, please sign the enclosed copy in the space indicated and return it to us. If you have identified other returns you want us to prepare, please list them below your signature.
Thank you for your confidence in us.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Date:
1120 - CORPORATION TAX RETURN ENGAGEMENT LETTER
Dear CLIENT NAME:
Thank you for selecting (YOUR FIRM NAME) to assist the (NAME OF CORPORATION) with tax compliance for (0000). The purpose of this letter is to confirm the terms of our engagement and the services we will provide. You received this letter because we understand you are the person responsible for the tax matters of the corporation. If that is not correct, please tell us who that person is so that we can coordinate return preparation work with the right party.
We expect to perform the following services:
1. Prepare the federal, state, and local income tax returns with supporting schedules.
2. Perform a limited amount of bookkeeping and analysis necessary for preparation of the income tax returns.
Our work does not include any procedures designed to discover defalcations or other irregularities.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law includes penalties that may be imposed when taxpayers understate their tax liability. If you would like information about those penalties, please call this office.
Management is responsible for proper recording of transactions in the accounts, safeguarding assets, and for the substantial accuracy of the financial records. Because you have final responsibility for the tax returns, you should review them carefully before you sign and file them.
Your returns may be audited by the taxing authorities. Any proposed adjustments are subject to certain appeal. Should your returns be selected for examination, upon request we can arrange to be available upon request to represent you. Such representation would be a separate engagement, and we would render additional invoices for fees and expenses incurred.
Our fee for preparing the tax returns described above will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent allowed by state law, an interest charge will be added to all accounts not paid within thirty (30) days.
We retain copies of the records you have supplied to us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files are destroyed. Your original records will be returned to you at the end of this engagement. Our working papers and files are not a substitute for your original records, and you should arrange for secure storage of the originals.
If this letter correctly recites your understanding, please sign the enclosed copy in the space indicated and return it to us in the envelope provided.
Thank you for your confidence in us.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Date:
1120S - S CORPORATION TAX RETURN ENGAGEMENT LETTER
Dear CLIENT NAME:
Thank you for selecting (YOUR FIRM NAME) to assist the (NAME OF S CORPORATION) with tax compliance for (0000). The purpose of this letter is to confirm the terms of our engagement and the services we will provide. You received this letter because we understand you are the person responsible for the tax matters of the corporation. If that is not correct, please tell us who that person is so that we can coordinate return preparation work with the correct party.
We expect to perform the following services:
1. Prepare the federal, state, and local income tax returns with supporting schedules.
2. Perform a limited amount of bookkeeping and analysis necessary for preparation of the income tax returns.
Our work in connection with preparation of your income tax returns does not include procedures to discover defalcations or other irregularities.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The law includes penalties that may be imposed when taxpayers understate their tax liability. If you would like information about those penalties, please call this office. Because an S corporation is an entity whose tax items are generally reported by its shareholders, any penalty for substantial understatement of tax relating to S corporation items will be imposed at the shareholder level.
Management is responsible for proper recording of transactions in the accounts, safeguarding of assets, and substantial accuracy of the financial records. Because you have final responsibility for the returns, you should review them carefully before you sign and file them, and send tax reporting information to the shareholders.
Our fee for the services described will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent permitted by state law, an interest charge will be added to all accounts not paid within thirty (30) days.
We retain copies of records you supply to us along with our work papers for your engagement for a period of seven years. After seven years, our work papers and engagement files are destroyed. All of your original records will be returned to you at the end of this engagement. Because our working papers and files are not a substitute for the original records, you should store them in a secure place.
To indicate that this letter agrees with your understanding of the terms of our engagement, please sign the enclosed copy in the space indicated and return it us in the envelope provided.
We appreciate your confidence in us.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Date:
5500 - QUALIFIED RETIREMENT PLAN RETURN ENGAGEMENT LETTER
Dear ADMINISTRATOR NAME:
Thank you for selecting (YOUR FIRM NAME) to assist you with tax compliance for the (NAME OF PLAN). This letter confirms the terms of our engagement for the plan year ended (0000) and clarifies the tax services we will provide. To indicate that the letter correctly states your understanding and mutual responsibilities, we ask you to confirm that by returning a signed copy.
We will prepare your (0000) Form 5500 (or other 5500 series form) from information you provide. We may need to ask you for clarification of some of the information, but we will not audit or otherwise verify the data you submit. We will provide checklists, questionnaires, and/or worksheets to help you efficiently gather information required for a complete return. Use of the forms will assure that pertinent information is not overlooked.
Your responsibilities include providing information required for preparation of a complete and accurate return. Documents and other data that support the Form 5500 filing may be needed to prove the accuracy and completeness of the returns to the IRS and/or Department of Labor should the return be selected for examination, so you should retain all original documents. Since you have final responsibility for the return, you should review it carefully before you sign it.
Our work in connection with preparation of your Form 5500 does not include procedures to discover defalcations or other irregularities, including the presence of “prohibited transactions.”
The law imposes substantial penalties on “prohibited transactions”. If you would like information about those penalties, or you would like us to include procedures to detect them should they be present, please call this office.
We will use our judgment in resolving questions where the tax law is unclear, or where there may be conflicts between the taxing authorities’ interpretations of the law and other supportable positions. Unless you instruct us otherwise, we will apply the “realistic possibility of success” standard to resolve such issues in your favor where possible.
The Internal Revenue Service and/or the Department of Labor may select any Form 5500 for examination. Proposed corrective adjustments by an examining agent are subject to appeal. We can arrange to be available upon request to represent you in the event of such government examination. That service is not included in our engagement to prepare returns. We will prepare a separate engagement letter for it and render additional invoices for fees and expenses incurred.
Our fee for preparing the returns discussed above will be based on the time required at standard billing rates plus out-of-pocket expenses. All invoices are due and payable upon presentation. To the extent allowed by state law, an interest charge will be added to all accounts not paid within thirty (30) days.
We retain copies of the records you supply to us along with our work papers for your engagement for seven years. After seven years, our work papers and engagement files are destroyed. All of your original records will be returned to you at the end of this engagement, and you should store them securely.
This engagement letter relates only to the plan(s) specified above. Please notify us if you have additional employee benefit plans that require our attention.
To indicate that the contents of this letter describe your understanding of the service we are to provide, please sign the enclosed copy in the space indicated and return it to us in the envelope provided.
If there are other projects you would like to discuss, or if you have comments you wish to call to our attention, please note those just below your signature.
We appreciate your confidence in our firm.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Date:
TAX EXAMINATION ENGAGEMENT LETTER
Dear CLIENT NAME:
This letter confirms arrangements for us to represent you in connection with an (IRS or STATE OF XXX) examination of your (0000) (FEDERAL or STATE XXX) income tax return(s). In order to begin this engagement, please sign the attached Form 2848, Power of Attorney and Declaration of Representative, (OR EQUIVALENT STATE FORM) which we will use to notify the IRS that we are your authorized representative, and return a signed copy of this letter provided for the purpose of confirming the terms of our engagement.
We will represent you before the IRS (OR OTHER AGENCY) during this examination, unless either party terminates the arrangement in writing. In the event we cannot resolve all issues at the examination level, we can prepare and present an appeal of any proposed deficiency at the Appeals Division of the Internal Revenue Service, although that appeal is not part of this engagement.
We generally will not audit, or otherwise verify, information you provide for presentation to the Internal Revenue Service during the course of the examination. However, we may ask you for further clarification and expect you to provide that clarification promptly and candidly. Also, our professional standards require that we make inquiry about representations that seem unusual or inconsistent with other knowledge we have of your affairs.
Your communications with us regarding matters raised in an examination of your tax returns are “confidential,” not “privileged.” That means, in most cases our communications cannot be disclosed to third parties without your approval. Tax advice has limited protection from disclosure to the Internal Revenue Service. On the other hand, privileged communications are not permitted to be disclosed, even in court. There is no accountant-client privilege in criminal tax matters. Accordingly, if we are served by a properly issued administrative summons compelling us to testify in court proceedings, even our confidential communications are subject to disclosure, except in the limited circumstance of tax advice. In the event we are served with a summons regarding your affairs we will immediately contact your legal counsel so that your rights can be protected.
The Internal Revenue Service has recently initiated procedures that have led to a growing number of requests by examining agents to interview the taxpayer directly. However, you have a statutory right to be represented, and not to meet with the examining agent (unless you are served with an enforceable administrative summons). It is in your best interest to refer any questions or other contact from a revenue agent or other tax official to us without any discussion with the tax official. While our firm is engaged as your representative, you agree that any direct contact by the IRS, or other tax officials will be promptly referred to us as your authorized representative. If you choose to appear before, or discuss this case with, a tax official against our advice, you do so at your own risk.
Fees for our representation (plus out-of-pocket expenses) will be billed as incurred.
(OPTIONAL: We also require a retainer of $______, payable with your acceptance of this agreement.)
Fees and expenses are due and payable upon presentation of our invoice. Your retainer will be applied against our final billing in this matter. Our fee for representing you will be based on the skill level of the personnel engaged, results achieved, and time spent. [OPTIONAL - We estimate our fees to be $______ or on average $______ per hour.] If we have not received payment in accordance with the stated terms, we reserve the right to terminate this engagement without notice.
To indicate that this letter correctly summarizes your understanding of the terms of our engagement, please sign and return one copy in the enclosed envelope.
Thanks for your confidence in our firm.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Title:
Date:
CONFIDENTIALITY PRIVILEGE ENGAGEMENT LETTER
(This privilege is only available for communications between the taxpayer and Attorneys, Enrolled Agents, and Certified Public Accountants)
Dear CLIENT NAME:
The Internal Revenue Code, as amended by the Internal Revenue Service Restructuring and Reform Act of 1998, extends a confidentiality privilege to qualified tax advice that we provide to you as your CPAs. In order to ensure that all communications between us that relate to tax advice are covered under the privilege umbrella of the Act, we are asking you to confirm the following arrangements:
We will provide tax advice to you as needed or requested to meet specific objectives or generally to meet long-term tax related goals and objectives. You have the right to review and/or be supplied with copies of any and all tax planning or research memos and workpapers prepared by our firm related to such tax advice. Tax advice includes, but is not limited to, the following:
1. Research to determine the income tax reporting of a particular transaction.
Providing business tax advice and consulting to you, throughout (0000) for consideration in making tax-related decisions
Providing services related to the expected outcome of tax decisions.
Privileged tax advice does not include communications associated with the preparation of tax returns, tax accrual workpapers associated with a financial audit or other financial statement engagement, communications associated with tax shelters, general business or accounting recommendations, or other non-tax engagements.
You may assert the confidentiality privilege in any non-criminal tax matter before the IRS or any proceeding in Federal Court brought by or against the United States
We will not disclose any advice provided under the terms of this engagement letter to the Internal Revenue Service or third parties unless you instruct us to do so. Any disclosure of confidential information by you or us to the IRS or third parties may cause the Confidentiality Privilege to be lost. Both parties must take care that the privilege is not inadvertently waived. You should notify us of any requests by the Internal Revenue Service for information about any tax advice or tax advice documents provided to you under the terms of this engagement letter.
If you advise us to assert the Confidentiality Privilege on your behalf you agree to hold YOUR FIRM NAME harmless and indemnify us for any attorney fees and any other costs and expenses (including penalties) incurred by us in defending the confidential communication.
Sincerely,
YOUR FIRM NAME
ACCOUNTANT IN CHARGE
Accepted By:
Title:
Date:
OPTIONAL PARAGRAPHS FOR TAX ENGAGEMENT LETTERS
A. Accuracy-Related Penalty Disclosure Warnings
Individuals:
The law imposes a penalty when a taxpayer has a “substantial understatement” of tax liability. For individuals, a substantial understatement exists when the understatement for a year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. The penalty is 20 percent of the tax underpayment. Taxpayers may avoid all or part of the penalty by showing that (1) they acted in good faith and there was reasonable cause for the understatement, (2) the understatement was based on substantial authority, or (3) the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. You agree to advise us if you wish disclosure to be made in your returns or if you desire us to identify or perform further research with respect to any material tax issues for the purpose of ascertaining whether, in our opinion, there is “substantial authority” for the position proposed to be taken on such issue in your returns.
For Partnerships and Limited Liability Companies:
The law imposes a penalty when a taxpayer has a “substantial understatement” of tax liability. For partnerships and individual taxpayers, a substantial understatement exists when the understatement for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. The penalty is 20 percent of the tax underpayment. Taxpayers other than “tax shelters” may avoid all or part of the penalty by showing that (1) they acted in good faith and there was reasonable cause for the understatement, (2) the understatement was based on substantial authority, or (3) the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. A taxpayer is considered a “tax shelter” if its principal purpose is to avoid federal income tax. Because a partnership is an entity whose tax attributes flow through to its partners, the penalty for substantial understatement of tax relating to partnership items may be imposed on the partner. You agree to advise us if you wish disclosure to be made in your returns or if you desire us to identify or perform further research with respect to any material tax issues for the purpose of ascertaining whether, in our opinion, there is “substantial authority” for the position proposed to be taken on such issue in your returns.
For C Corporations:
The law imposes a penalty when a taxpayer has a substantial understatement of tax liability. For corporate taxpayers, a substantial understatement exists when the understatement for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $10,000. The penalty is 20 percent of the tax underpayment. Taxpayers may avoid all or part of the penalty by showing that (1) they acted in good faith and there was reasonable cause for the understatement, (2) the understatement was based on substantial authority, or (3) the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. You agree to advise us if you wish disclosure to be made in your returns or if you desire us to identify or perform further research with respect to any material tax issues for the purposes of ascertaining whether, in our opinion, there is “substantial authority” for the position proposed to be taken on such issue in your returns.
For S Corporations:
The law imposes a penalty when a taxpayer has a “substantial understatement” of tax liability. For S corporations and individual taxpayers, a substantial understatement exists when the understatement for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. The penalty is 20 percent of the tax underpayment. Taxpayers other than “tax shelters” may seek to avoid all or part of the penalty by showing (1) that they acted in good faith and there was reasonable cause for the understatement, (2) that the understatement was based on substantial authority, or (3) that the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. A taxpayer is considered a “tax shelter” if its principal purpose is to avoid Federal income tax. Because an S corporation is an entity whose tax attributes generally flow through to its shareholders, the penalty for substantial understatement of tax relating to S corporation items may be imposed at either the corporate or shareholder level. You agree to advise us if you wish disclosure to be made in your returns or if you desire us to identify or perform further research with respect to any material tax issues for the purpose of ascertaining whether, in our opinion, there is “substantial authority” for the position proposed to be taken on such issue in your returns.
For Fiduciaries (Estates and Trusts):
The law provides for a penalty to be imposed where a taxpayer makes a substantial understatement of its tax liability. For fiduciary taxpayers, a substantial understatement exists when the understatement for the year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. The penalty is 20 percent of the tax underpayment. Fiduciaries may seek to avoid all or part of the penalty by showing (1) that they acted in good faith and there was reasonable cause for the understatement, (2) that the understatement was based on substantial authority, or (3) that the relevant facts affecting the item’s tax treatment were adequately disclosed on Form 8275 or 8275-R attached to the return and there was reasonable basis for the position. You agree to advise us if you wish disclosure to be made in the returns or if you desire us to identify or perform further research with respect to any material tax issues for the purpose of ascertaining whether, in our opinion, there is “substantial authority” for the position proposed to be taken on such issue in the returns.
B) Disclosure of Reportable Transactions
The law provides substantial penalties for failure to disclose “reportable transactions.” Generally, reportable transactions include transactions identified by the IRS as primarily tax motivated. The rules are complex, and whether or not a transaction is “reportable” may be open to interpretation. In any event, you agree to advise us of any transaction you engage in that is either a “listed transaction” as identified in published IRS guidance, or a transaction whose primary purpose is tax avoidance. Because the law imposes penalties on preparers as well as taxpayers for failure to disclose reportable transactions, you agree that the decision to disclose any such transaction in the returns we prepare for you is ours alone. Should we not be permitted to complete the returns, you agree to pay all fees and expenses incurred.
C) Additional Services
This engagement does not include any services not specifically stated in this letter. However, we would be pleased to consult with you regarding other tax matters, such as proposed or completed transactions, income tax projections, and for research in connection with such matters. We will render additional invoices for such services at our standard billing rates
D) Representation as to Accuracy
You represent that the information you are supplying to us is accurate and complete to the best of your knowledge and that your claimed expenses for meals, entertainment, travel, business gifts, charitable contributions, dues and memberships, and vehicle use are supported by records as required by law. We will not verify the information you give us. However, we are required by federal regulations to ask you for clarification of information that is inconsistent or incomplete.
E) Outside Processing
Parts of your tax return will be processed by an outside processing center. Please advise us if you prefer that we not use the outside processing resource for your return.
F) Peer Review Disclosure
We subscribe to a program of peer review for maintenance of quality control in our practice. As part of this program, your return may be selected for review by other CPAs under strict rules of confidentiality. Your acceptance below includes your agreement for disclosure under the program.
G) Disclosure of Interest Charge (where permitted by state law)
A late payment charge of __ percent per month will be assessed on any balance that remains unpaid after deduction of current payments, credits, and allowances after 30 days from the date of billing. This is an Annual Percentage Rate of ___ percent.
H) Negligence Penalty Warning
The law imposes a penalty of 20 percent on any underpayment that results from negligence or disregard of rules or regulations. Negligence “includes any failure to make a reasonable attempt to comply...” with the tax law. Disregard “includes any careless, reckless or intentional disregard.” Taxpayers may avoid all or part of the penalty by showing that they acted in good faith and by demonstrating that they have a reasonable basis for the understatement: in other words, by showing that they were not negligent.
I) Confidentiality Privilege Disclosure
The IRS Restructuring and Reform Act of 1998 provides limited confidentiality privilege for communications between you and our firm involving tax advice. The privilege does not cover items other than tax advice such as your tax records, tax return preparation, state tax proceedings, criminal proceedings, or private civil litigation. Any disclosure of otherwise qualifying confidential information to the government or any third party may result in waiver of confidentiality privilege protection. To protect your right to privileged communication, please contact us if you have any questions or need further information.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- sample bio letters about yourself
- sample engagement letters for accountants
- sample promotion letters to employees
- free sample cover letters for employment
- sample engagement letter for services
- sample spiritual letters of encouragement
- sample cover letters for employment
- sample review letters for aicpa
- sample surgery letters from physician
- cpa engagement letters samples
- engagement letters for cpas
- tax engagement letters for cpas