Engagement Letter Provisions in a Dynamic and Rapidly Changing Profession

By John F. Raspante CPA, MST, CDFA, McGowan Pro and Anthony Candela, CPA, MST, Candela and Associates, LLC – January 18, 2024
Engagement Letter Provisions in a Dynamic and Rapidly Changing Profession

As the accounting profession undergoes dynamic and rapid changes, engagement letter clauses must spell out any additional services and how any increased risk will be managed. The letters need to include such clauses with a brief reason(s) for their use and the resulting benefit(s). The clauses below represent some of the areas of practice that contribute to heightened claim exposure.


Still in the growth stage, the cannabis industry is causing claim exposure in both tax preparation and financial statement preparation. The tax exposure results from the difference in tax treatment for state and federal purposes. Financial statement concerns have centered on disclosure requirements including, but not limited to, risks and uncertainties and compliance with laws and regulations.

Pass-Through Entity Tax

As of the writing of this article, 30 states and one locality have enacted a pass-through entity (PTET) tax since the Tax Cuts and Jobs Act state and local tax (SALT) cap/limitation was first put into place. Claims have included failure to make a timely election, failure to advise clients of the benefit of a PTET, and application of the PTET to non-resident shareholders, members and partners.

Force Majeure

The clauses below were seldom used prior to the COVID-19 pandemic. These clauses are now strongly recommended and, unlike many engagement clauses, they have been met with little client resistance.

  • Termination language — Our engagement may be terminated at will by either party upon thirty (30) days written notice, but may be terminated immediately upon written notice for your non-payment of our invoiced fees and costs; your inability or unwillingness to fulfill your obligations to us as described above, including the provision of documents or other information in a timely fashion; or if, in the sole discretion of the terminating party, any continuation of the engagement would be contrary to law or professional standards, or otherwise harmful or improper.
  • Force majeure language — Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any obligation under this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party, including but not limited to fire, floods, embargoes, war, acts of war, insurrections, riots, strikes, lockouts or other labor disturbances, or acts of God; provided, however, that the party so affected shall use reasonable commercial efforts to avoid or remove such causes of nonperformance, and shall continue performance hereunder with reasonable dispatch whenever such causes are removed. Either party shall provide the other party with prompt written notice of any delay or failure to perform that occurs by reason of force majeure.

Wayfair/ Nexus

Though it is not a new clause, the clause below has helped with both claims defense and sorting out client confusion on the scope of the CPA’s responsibility with the passage of the Wayfair Act:

From information you provide to us, our firm will prepare [INSERT YEAR] federal and state corporation/partnership income tax return(s) for the state(s) of: [INSERT SPECIFIC STATE(S)’ NAMES]. This firm is responsible for preparing only the returns listed in the preceding sentence. Please note that if your corporation/partnership has an income tax filing requirement in a given state but does not file the required income tax return, it is possible that the nonfiling could have adverse ramifications including (i) an unlimited assessment statute of limitations and (ii) inability to claim net operating losses or other tax attributes on any future years’ income tax returns.

If your business has any operations in states other than those specifically listed, you are responsible for providing our firm all information necessary to prepare any additional applicable state(s) income tax returns such as the identity of all states in which XYZ Corporation/Partnership does business and the extent of business operations in each relevant state. Any additional state income tax returns prepared will be done as a separate engagement.

Alternatively, under a separate engagement, using gross sales, payroll and other data provided by you, our firm can perform an investigation to determine each state where the XYZ Corporation/Partnership has an income tax return filing requirement. Please inform our firm if you would like to have such an investigation performed.

Increased Tax Enforcement and Compliance

With the creation of the Inflation Reduction Act, there is no doubt that tax examinations will increase. History has shown that when IRS tax examinations increase, there is a corresponding increase in professional liability claims plaguing CPAs. The clause below is one of many clauses risk management professionals have been advocating to limit this peril:

We will provide you with questionnaires and work sheets to guide you in organizing the information we need to prepare your tax returns. You represent that the information you are supplying to us is accurate and complete to the best of your knowledge. We will not verify the information you give us. Unless you specifically indicate the portion of any business expenses as personal, we will treat all such expenses as business deductions. If any expenses are disallowed by the taxing authorities, you will hold us harmless from any damages assessed by the taxing authorities. However, we may ask for clarification of some of the information. Any information we receive from you will be treated as confidential and is subject to disclosure by us only at your request or as compelled by law or for regulatory matters. However, we may be required to disclose your confidential information to an outside service bureau that assists us in providing tax preparation services.

Digital Currency

For clients involved with digital currency, the following should be used:

You are responsible for informing us, in writing, of any holdings of/transactions in virtual currency (i.e., cryptocurrency or any other digital representation of value) at any time during the tax year, as these are subject to taxation and reporting may be required (see Notice 2014-21, irs.gov/pub/irs-drop/n-14-21.pdf.). If you do not do so, your tax return may be incorrect, and tax, interest, penalties, and other assessments may imposed, for which we have no responsibility. Because the Internal Revenue Code requires taxpayers to maintain records sufficient to establish positions taken on tax returns, you should maintain records documenting receipts, sales, exchanges, or other dispositions of virtual currency, and the fair market value of the virtual currency. Because tax law related to virtual currency is new/evolving/unclear, any recommended tax treatment will be based on interpretation of the guidance available at the time of consultation, and there is an inherent risk that future revisions may be needed, resulting in additional tax, interest, penalties, and other assessments, for which we will not be responsible. 


For firms that outsource client work, the following clause can be included:

We may, from time to time, and depending on the circumstances, use third-party service providers to assist in preparing your return, but these preparers will not make substantive decisions concerning your return. We may share your tax return information with these service providers, but remain committed to maintaining the confidentiality and security of your information. Accordingly, we maintain internal policies, procedures and safeguards to protect the confidentiality of your personal information. In addition, we will secure confidentiality agreements with all service providers to maintain the confidentiality of your information and we will take reasonable precautions to determine that they have appropriate procedures in place to prevent the unauthorized release of your confidential information to others. In the event that we are unable to secure an appropriate confidentiality agreement, you will be asked to provide your consent prior to the sharing of your confidential information with the third-party service provider. Furthermore, we will remain responsible for the work provided by any such third-party service providers.  

Cybersecurity for Remote Work

Regarding remote work, the following can be used:

In connection with this engagement, we may communicate with you or others via email transmission, and by signing this letter, you authorize us to do so. As emails can be intercepted and read, disclosed, or otherwise used or communicated by an unintended third party, or may not be delivered to each of the parties to whom they are directed and only to such parties, we cannot guarantee or warrant that emails from us will be properly delivered and read only by the addressee. Therefore, we specifically disclaim and waive any liability or responsibility whatsoever for interception or unintentional disclosure of emails transmitted by us in connection with the performance of this engagement. In that regard, you agree that we shall have no liability for any loss or damage to any person or entity resulting from the use of email transmissions, including any consequential, incidental, direct, indirect, or special damages, such as loss of revenues or anticipated profits, or disclosure or communication of confidential or proprietary information.

Anthony Candela

Anthony Candela, CPA, MST, is the managing member of Candela and Associates, LLC.
John F. Raspante

John F. Raspante

John F. Raspante, CPA, MST, CDFA, is the director of risk management for McGowanPRO. He is a member of the NJCPA Accounting & Auditing Standards Interest Group and the Content Advisory Board.

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This article appeared in the winter 2023/24 issue of New Jersey CPA magazine. Read the full issue.