Engage For Each Year?

I'm mostly talking about 1040 income tax preparation only clients. I have lots of them.

My client service agreement / engagement agreement states that the engagement will terminate when the tax return is filed.

I like this because I don't feel as obligated to help a client in future years or with anything else if I choose not to.

Note that I also spend every November raising prices and firing a few clients with "notification in advance" anyway - so that's a little redundant.

But requiring returning clients to sign the agreement is creating a massive time cost. At 800 returns per year, it is a LOT of work and admin to make sure each client, and spouse, and student kids are all signing the letters before I provide advice or begin work on the returns. Wait a pain.

Do you engage year by year with these types of clients? Or do you keep the engagement "active" for years in a row?

I prefer to have an engagement letter for each compliance year. Others on this forum prefer to have no engagement letter. I'm sure there are others in-between with engagement letters that span multiple years. What I'm getting at is I don't think there is a right or wrong answer. Merely what works for you as a business owner and what you deem appropriate after consulting your E&O.

How long does it take someone at your practice to prepare a 1040 engagement letter from pulling the template to filing away the executed copy? Do you send for wet signature? Or is it automated e-signature?

There are tools out there to do this via email. We used signature flow in the past, but that is one of many product/services available.
We had the same issues and made this change. It was a great improvement.

If you are e-mailing or pony mailing current client's tax organizers, you can have one paragraph that they sign to extend the already signed engagement letter with modifications if necessary. I use this method. I have also seen annual engagement letters and engagement letters that renew automatically each year ONLY if preparer files the tax return.

Not sure about the multi-year stuff. How do you deal with clients who lose the original and who then (reasonably enough) say they don't recall what was in the agreement two, five or ten years ago? I know they'd probably fight anyway but wouldn't having something signed recently tend to snuff out that argument?

We include 1040 engagement letter with tax organizers, either mailed or emailed, depending on client wish. It is printed by the tax software, so only cost is a little time & paper for a few extra pages. If they forget it, no problem to reprint. Not that big of a deal. If extra services, like a gift tax return, then we do a separate engagement for that. In pre-Covid times, we also setup prescheduled appointments & included time/date on the cover page of the organizer. Somewhat surprisingly, most clients kept the prescheduled appointments.

Not sure about the multi-year stuff. How do you deal with clients who lose the original and who then (reasonably enough) say they don't recall what was in the agreement two, five or ten years ago? I know they'd probably fight anyway but wouldn't having something signed recently tend to snuff out that argument?

People who want to pick a fight because they lost some paperwork will do it anyways. I do include a copy of the engagement letter on file with the organizer. I am sure it is trashed!

My E&O has requested we obtain them annually. Thus, I do and retain for as long as I retain a copy of the tax return(s).

Still waiting on OP to tell us his or her process and how long it's taking him or her per engagement letter...

I would think it looks better from a legal perspective if one declines to re-engage a client vs terminates an open contract, but I'm no attorney.

My compliance engagements are for one tax year, and terminate at the first of any of the following: (1) when the returns are filed (or delivered if paper filed), (2) when the engagement is terminated in writing by either party, (3) one year from engagement letter execution date.

Still waiting on OP to tell us his or her process and how long it's taking him or her per engagement letter...

OK, got a sec? Some of you might find my business model interesting.

My current agreement terminates like yours every year when the taxes are filed or delivered for mail However this creates a huge time cost to us that reflects significantly in the bottom line.

We have a "backwards" appointment/preparation flow with our clients, and this allows us to speed through significant volume while not compromising accuracy or CS.

The client first drops off, uploads, or a combination of those.

We don't give initial appointments....

...or any appointments, until the tax return is nearly completed. If a client situation is so complicated to where one is needed, we'll file an extension and provide an initial appointment in the off season.

We have 2 part-time data assistants. They download the docs to our drives, sort the data, and enter most of it into the preparation software.

Then it goes to my wife, who is not just your "token pretty face" but is a sharp and dedicated business partner, tax preparer, and has taken tax preparation, payroll, sales tax, and accounting classes for her Bachelors degree (completed), and has been helping me for several years. She's a tiger. She double checks the data entry, enters the more complex items like D, C, and E, and shakes the client down for needed data.

Than it goes to me where I triple check the entry, review the return, and put the client on the "ready for review list".

The client then gets the option of a live review with me (30 minute appointment) or an electronic review and signature with an optional phone call. Clients LOVE the live review prior to their taxes being finalized and it's a 4th check on the return for accuracy that includes the client. This is where we talk about all of the clients tax concerns (WH, ES Taxes, selling that rental, etc) and, as we all know, it's "me" that they are paying for.

I have a third and giant monitor (facing mostly toward them) for me to briefly present and explain their taxes (and check the account number for their refund). My office is particularly clean and not cluttered. I have big and cushy office chairs for them to sit in.

So I'm (at most!) 40 minutes invested on $300-$600 tax returns. They are accurate and the client is happy. It's a tight operation. We're not playing around. Our goal is to do about 800+ of them a year like that, among the other services that we offer.

The pre-signed, one year engagement agreement throws a big wrench into the entire process!

Oh the problems.

It's more work than the the tax prep.

Getting the spouse to coordinate a signing is like pulling teeth in some cases. What's her email? He doesn't answer the email, she cant figure out the RightSignature, he forgets to sign the agreement with the organizer, or to get her signature. Now he has to come in twice? Wait - this spreadsheet says one or both of them didn't sign and the deadline is approaching. Wait again, who forgot to update this on the spreadsheet and we asked them twice and held up the preparation of the return? I could go on and on.

Tracking who has signed and who hasn't takes more effort than the tax return itself. My data people cant seem to get it right, and I have my wife so task-saturated, I don't want to charge her with this too.

If I could go with a running agreement, my system would be so much more simple and streamlined and the practice would be more profitable.

Ultimately you have to do what works for you. It seems like your clients have a problem with your process, so you'll have to explore why that is. e.g. Are you not explaining and communicating well enough? Do a significant portion of your clients have problems using computers and doing computer related tasks? Is something wrong with their browser? Are most of your clients procrastinators? Do you not follow up enough? etc

Your target demographic also seems to be much different than mine, so what works for me might not work for you. My average return fee is above $1,000. It's rare that I have a 1040 priced at $500 or below.

Without going into the weeds, I estimate it takes me no more than 15-20 minutes from pulling the engagement letter template to pressing send in RightSignature, which I deem to be acceptable on my end and I internalize that time in the client's fee. So this isn't really "lost" time but rather necessary overhead (IMO, maybe not others) that is passed on to the client.

I also use RightSignature for nearly everything that requires a signature. I don't enable KBA for the engagement letters and haven't experienced a single client issue regarding the engagement letters since I started my current process back in January. I'd say 80% of my clients e-sign within a week of me sending it without further prompt from me. 19% have to be reminded and sign within a month. 1% go radio silent and I never hear from them again. They are prospects that somehow got through my screening and filter process and made it all the way to the engagement letter.

Without going into the weeds, I estimate it takes me no more than 15-20 minutes

Those are the time costs I'm contemplating.

If I'm spending 40 minutes on each $500 tax return - adding 15-20 more is diluting my revenue by nearly 50%.

That's the TL;DR of my long post.

It could mean the different of $400,000 instead of $300,000.

Are the advantages of an agreement that terminates every year worth $100,000? (that's not rhetorical - maybe it is, maybe it isn't.)

Considering some preparers do not even use them, I'm leaning toward no.

When someone files a malpractice claim against you, you incur $20K-$50K legal fees for defense even when you think you did no wrong, and do not have an engagement letter, it might be worth it.

We send them out with Organizers for individual returns and PBC lists for other returns. Our Admin staff are responsible for tracking when we get them and bugging the clients if we don't.

What does your professional liability insurance carrier have to say on the subject?

If I'm spending 40 minutes on each $500 tax return - adding 15-20 more is diluting my revenue by nearly 50%.

Build that overhead cost into each client's fee and you don't have to worry about it anymore.

Getting the spouse to coordinate a signing is like pulling teeth in some cases.

Do you have to get the spouse to sign the letter? Most of the sample engagement letters i've looked at over the years have a paragraph indicating that whoever signs the letter is signing on behalf of both spouses.

I also send my engagement letters out the first of January with the organizers, with a note to return with their tax documents. Once I begin working on their return, if it is not with the other documents, that is one of the items I ask about( along with where is your 1099 from XYZ Co). I don't think there is much additional time at all, other than revising the engagement letter each year.

Do you have to get the spouse to sign the letter? Most of the sample engagement letters i've looked at over the years have a paragraph indicating that whoever signs the letter is signing on behalf of both spouses.

I'm not an attorney, but I did stay at a Holiday Inn....sometime in the...recent...past. How is someone bound to a contact that they never examined, nor signed, but another individual signed "on behalf of them" with no power of attorney or written authorization between the individuals. Please feel free to reference cites.

I hope it's not rude to ask for advice and then argue with the replies, but perhaps some can gain further insight from my thoughts about these. Also, if anyone thinks I'm way off, please let me know and save me form myself.

Do you have to get the spouse to sign the letter?

I'm worried about getting sued by a spouse (or shareholder/partner)more than ANYTHING else, especially if there is a divorce in the future.

In general, for non-spouse related issues, I doubt an engagement agreement of any kind can help me much in a law suit.

I also doubt the one will help me not to get sued.

But a spouse's signature means that she is on board with the preparation and I engaged with the spouse in the process. I think this is THE most important thing to have on file in this entire discussion about engagement agreements.

If I'm spending 40 minutes on each $500 tax return - adding 15-20 more is diluting my revenue by nearly 50%.

Build that overhead cost into each client's fee and you don't have to worry about it anymore.

if I could do that and not have the time cost, I'd rather pocket the extra profit.

When someone files a malpractice claim against you, you incur $20K-$50K legal fees for defense even when you think you did no wrong, and do not have an engagement letter, it might be worth it.

Will an engagement agreement really help prevent a malpractice suit and the legal fees?

How about an engagement agreement that continues for more than one year instead of terminating (that was the subject of the OP)? Will that make it so I get sued more often?

Note that my agreement disclaims turnaround time and deadlines.

Also, if it costs me $50K every 5 years when I get sued (if it happens that often) and I save $100,000 in time costs each year, it's easily worth it - though I maintain that I will get sued just as much with one that terminates, with one the does not terminate, or without one at all.

Do you have to get the spouse to sign the letter? Most of the sample engagement letters i've looked at over the years have a paragraph indicating that whoever signs the letter is signing on behalf of both spouses.

I'm not an attorney, but I did stay at a Holiday Inn....sometime in the...recent...past. How is someone bound to a contact that they never examined, nor signed, but another individual signed "on behalf of them" with no power of attorney or written authorization between the individuals. Please feel free to reference cites.

Because they're married. i'm also not an attorney, which is why i asked the damn question about whether you had to get both spouses to sign the damn thing.

One of the prime reasons I have my engagement letter automatically renew with the organizer is because of the issue OP raised. If the client never sends any tax documents and I don't prepare any return for that year it cancels. I have to then treat that taxpayer as a new client and get the letter signed again.

The bottom line for me is to get the process streamlines that works for my business model. You will need to figure out what would work for you, give it a try and adjust accordingly. My process before electronic filing and document delivery was more like the HRB or JH retail model.