Mitigating Professional Risk at Tax Time

Source: Journal of Accountancy

As the frenetic pace of tax season approaches, accounting firms face their annual test: Can they deliver timely tax work that’s free of errors, oversights, and client complaints? This article offers three tips to help firms avoid common problems that increase professional risk during this busy time of year.

1. Always use an engagement letter. This may sound obvious, but as workloads rise, engagement letters sometimes fall by the wayside. According to Deborah K. Rood, a CPA and risk control consulting director with CNA, an engagement letter signed by both parties can help avoid disputes or even professional liability claims, which often arise from disagreements over the scope of services. The engagement letter should be as specific as possible in outlining the terms of the relationship between the firm and client, including deadlines, billing, information on extensions and more.

Rood noted that a letter signed by both parties at the outset is preferable to a “unilateral or negative engagement letter” because it affords CPA firms greater protection against claims. A unilateral letter is one that a firm sends to clients stating the terms of the engagement. It becomes effective when clients respond by sending their tax information.

2. Document everything. The importance of having documentation in defense of a claim cannot be overstated, Rood said. In addition to the engagement letter, she suggests that CPAs document important conversations with clients and note any advice that is given. This can be done via email, with the memo saved to the client’s file.

Rood acknowledges that many CPAs may find this level of documentation to be unrealistic. A good rule of thumb? Consider “the impact of the advice and client sophistication” in deciding which conversations are best documented.

3. Make time to do it right. The potential for making mistakes increases along with workloads. To catch problems, set tax returns aside to review when you’re fresh. If possible, sole practitioners should consider putting returns aside for a week — enough time to perhaps forget some of the details, so they can review their work with fresh eyes. Rood also suggests using a checklist as returns are reviewed.

For the complete article, read “3 Ways to Mitigate Risk During Busy Season.” From Journal of Accountancy, Feb. 20, 2018.