Engagement letters are one of the best tools in a CPA’s risk management arsenal. Taking the time to update your templates ahead of busy season can help protect you in the months ahead. Follow these six tips to help ensure you cover your bases:

1. Review current-year engagement letter templates and update firm templates as needed. Tax and other guidance changes, and so should your engagement letter templates. Sources of sample engagement letters include your professional liability insurer, the American Institute of CPAs (AICPA) and others. Terms and conditions are an important part of an engagement letter and should be consistent across all services. Consider using a Terms and Conditions Addendum to help ensure consistency.
2. Review firm practices around engagement letters. While obtaining an engagement letter that has been signed by the client is the preferred risk management practice, engagement letters that do not require a client signature and only their tax return information may be practical for low-complexity, individual income tax return preparation engagements. Determine your firm’s threshold for when this type of letter may be acceptable.
3. Explore the benefits of technology in your engagement letter process. In 2024, approximately 55% of tax claims asserted against CPAs in the AICPA Professional Liability Insurance Program failed to utilize an engagement letter related to the service that was the subject of a claim. Tax claims without engagement letters are typically harder to successfully defend and, in most cases, more expensive regardless of outcome. Today’s practice management software and stand-alone engagement letter packages can automate the creation, delivery, signature and monitoring of engagement letters. Some technology may send reminder emails to clients or limit a client’s ability to access tax information until the engagement letter is signed.
4. Use engagement letters for all tax services. Hopefully you have an engagement letter for preparing the tax return, but when the client requests other services such as tax planning, tax consulting, notice response or tax audit representation, a new agreement is needed.
5. Include the date by which the client’s information must be provided in the engagement letter. Advise clients that the firm will not begin tax return preparation until receipt of the retainer, if requested; the executed engagement letter; and the completed and signed tax organizer.
6. Ensure that the correct engagement letter is mailed to the client…early. Everyone makes mistakes in the heat of busy season, so double check that the correct engagement letter and/or organizer is sent to the correct client. This is especially important when the organizer includes identifying information and last year’s tax return details.

Remember: Engagement letters can protect your firm only if they are used properly. Deliver your services as described in the engagement letter. Well-intentioned actions that expand the scope of services, such as “cleaning up” a client’s financial records to prepare a tax return or answering an ad-hoc question on an out-of-scope topic, can be detrimental in the event of a professional liability claim. If additional services or scope modifications are required to complete an engagement, confirm this new understanding, including applicable limitations, with the client in writing, whether through an email or an amendment to the engagement letter. For new services, issue a new engagement letter. 

The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA.

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