Engagement letter disclosure info

[NECPA in NEBRASKA]

I just received a risk alert from my AICPA insurance with example two paragraphs to insert in engagement letters regarding the new tax preparer standards. Then it says to explain this to clients before I present the engagement and start working on their returns. I have always mailed the engagement letters and they get them back to me with their information. I don't know how I'm going to find the time to discuss this with every one of my clients, especially the ones that I never see. Personally, I think that this will scare them. This whole thing has made me think about working for somebody else. I've been trying to read up on this and am confused as to if this means that I have to practically audit every return that I prepare. Am I worried needlessly? What are all of you planning to do about these changes? How will the H& R Blocks' and JHs' handle this? All opinions are welcome.

Thanks!

Bonnie

[joanmcq]

Can you please post the paragraphs?

[NECPA in NEBRASKA]

Here are the sample paragraphs. It doesn't say that it is copyrighted or anything, since it says that we can use it as an example.

The 2007 Small Business and Work Opportunity Act requires my firm as tax return preparer to conform to a higher standard than the taxpayer when an undisclosed tax position is being taken on your tax return. This higher standard requires the preparer to have a reasonable belief that the undisclosed tax position would more likely than not be sustained on it merits if challenged by the IRS, and that there be a reasonable basis for the tax treatment. Moreover, I may have to spend additional time preparing your return because of the extra research and analysis necessary to meet the standard. Accordingly, by signing this letter you acknowledge that you are aware of this difference in standards, and consent to my preparation of your federal income tax return in accordance with the standards applicable to my firm as tax preparer.

If I conclude as a result of my research that you are required to disclose a transaction on your tax return, you consent to attach a completed Form 8275 or 8275R to your tax return after we discuss the situation with you and agree to hold my firm harmless with respect to any and all actual and consequential damages (including but not limited to taxes, penalties, interest, and attorney fees and costs) that you incur as a result on including such disclosures with your filed tax returns.

[jainen]

>>Am I worried needlessly?<<

I don't think these paragraphs will accomplish their purpose (although I confess I can't perceive what that purpose might be). The effort would be better applied addressing professional ethics instead of asking the clients to waive their rights.

The law imposes new standards on ME, the tax preparer, and whether the client is aware of or consents to them is irrelevant. It's not even that big of a change: we now need a one in two likelihood instead of one in three. (But oh, that fine is so much higher!)

The idea of a hold harmless clause for tax preparation is rather offensive to me as a tax professional with a sense of personal accountability. Disclosure does NOT make an unrealistic position any better. This seems to say I will gladly expose my client to "actual and consequential damages" -- why, I'll even point it out to the IRS myself! -- as long as I don't get blamed.

Well, I doubt that such vague, hypothetical terms of engagement can be enforced. And anyway, those "taxes, penalties, interest, and attorney fees" won't come "as a result on including such disclosures," but from the unrealistic position itself -- the one that I as the client's professional tax advisor would have signed my name to.

[kcjenkins]

On this one, I'm with Jainen. I do not think many of us will have a need to discuss this with the majority of our clients. I will only be discussing this with those few who's returns actually have 'issues' that might make disclosure an issue. For those, however, I will make sure that they are informed appropriately. Adding it to all engagement letters seems to me, tho, as not only overkill, but also needlessly frightening to the client.

[NECPA in NEBRASKA]

I think that the paragraphs are overkill, but I tend to worry every time I read anything from my insurance company. Their seminars can be petrifying to a one person shop. If I did everything that they suggest, I would spend all of time doing administrative work and never anything billable. If I put this in all of my engagement letters, my clients would probably panic. I can't even think of when this would apply to my clients.

[OldJack]

>>I think that the paragraphs are overkill<<

Its just AICPA's way of CYA.