Tax engagement letter

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#1
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I just read an engagement letter from a large local CPA firm in my area.

One paragraph talks about how the firm will only be liable for $5000, or triple their fee (?), in case of any liabilities arising out of the engagement.

Really? Is this standard in other readers' engagement letters? The CPA firm makes a mistake, and the client owes the IRS $100,000 in taxes and $20,000 in penalties, and the CPA firm is only liable for $5000?

I've never heard of such a thing. Why would anyone agree to this?!?

Any comments appreciated.
 

#2
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Kendrick wrote:I've never heard of such a thing. Why would anyone agree to this?

These days it's rare to find any product warranty or terms of service that does NOT limit liability. It's one of the main reasons we use engagement letters in the first place. Plenty of clients know and trust that our work is good. We won't accept a client who needs to blame us if things go seriously wrong.

Obviously a tax preparer can not guarantee the accuracy of the return because he doesn't completely verify the source data. In all cases the taxpayer must assume a very large part of the responsibility by signing the return.

Nor can the preparer guarantee how IRS or Tax Court will interpret the law. Remember that the ethical standard for our work (under Circular 230) is only a one out of three chance of being upheld. The taxpayer himself is responsible for the other two thirds, a concept we often call risk tolerance or comfort level.
 

#3
Nilodop  
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Used such terms decades ago. But read the terms carefully. There can be exceptions to the limits. Something about negligence or gross negligence.
 

#4
Frankly  
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4Seasons wrote:Obviously a tax preparer can not guarantee the accuracy of the return because he doesn't completely verify the source data.
...
Nor can the preparer guarantee how IRS or Tax Court will interpret the law.

If I make a mistake I'll take the hit for it. But verifying source data, or an audit that doesn't work out as hoped is not necessarily a mistake on the part of the preparer.
 

#5
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Frankly wrote:If I make a mistake I'll take the hit for it.

The problem (at least for deep pockets like a large accounting firm) is that it can play out like this.
"You said I could take that payment to my ex as alimony. She proved it was child support, so now IRS wants five grand."
"So sorry, but we've got you covered."
"Glad to hear it! Because now my new wife found out I already got kids. She annulled our marriage and took her house back. You owe me a half mil, pal."
 

#6
JR1  
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A. Is this legal?
B. This has nothing to do with preparer penalties from the gov.
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Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#7
Nilodop  
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Yes it is legal.
 

#8
Nilodop  
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Here is one at random from the internet. http://www.bradymartz.com/cmsdocuments/ ... dopted.pdf

See 5.2 in particular.

I am not saying this rather long agreement is for everyone.
 

#9
Coddington  
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It's a standard provision. Typically, the only provisions I see clients worry about deal with choice of law and forum selection.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#10
LeslieK  
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My engagement letter limits the time that the client has to make a claim to one year from the time the services are provided and limits the damages to fees paid.
 

#11
Coddington  
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Mine limits the time for making a claim to one year and limits damages (of all kinds) to fees paid in the 12 months prior to the claim arising. The only real difference between my engagement letter and most firms in my part of the industry is that I warrant that it is a professional services engagement performed with due professional care. When I worked for Deloitte, they included that in their T&C and I always found it more ethical than trying to waive all warranties.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#12
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I've never heard of such a thing. Why would anyone agree to this?!?

I've seen similar provisions, as well as provisions that limit the damages to the amount that was charged for the return. People can sign a contract if they agree to the provisions. And considering the stuff I've seen happen, I understand why some tax preparers would want to add something like this to their engagement letters. Sometimes It only takes one crazy client to make you skittish forever.
 

#13
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I started this link. Well guess what, the potential client told the CPA firm no thanks, unless they remove that provision.

The CPA firm agreed to the change.

Paste that to your Broadway show.
 

#14
Frankly  
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Kendrick wrote:Well guess what, the potential client told the CPA firm no thanks, unless they remove that provision.
The CPA firm agreed to the change.
As well they should have. Ethically, one should take responsibility for ALL one's liabilities, with no limit.

Tax_Writer wrote:I understand why some tax preparers would want to add something like this to their engagement letters. Sometimes It only takes one crazy client to make you skittish forever.

A crazy client is not going to be dissuaded much by the fine print in an engagement letter, thus there is no "protection" there anyway. The crazy client is going to make a stink and sue anyway, but the judge will easily see that the preparer did good work with due diligence and a high standard of professionalism. And if the preparer did sloppy work and caused a problem, then he should be found liable and any fine print in the engagement letter should be ignored.

The best protection is to do good work with no mistakes that create liabilities. And when entering a gray area of interpretation, to communicate with the client that under audit IRS may interpret differently.
 

#15
makbo  
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Kendrick wrote:The CPA firm makes a mistake, and the client owes the IRS $100,000 in taxes and $20,000 in penalties, and the CPA firm is only liable for $5000?.

In no case should the preparer be automatically liable for the tax that was legally owed, although I'm sure some have been sued over that. Penalties, yes, interest, maybe. You can put anything you want in an engagement letter, it won't stop you from being sued. I see it mostly as a way to set expectations. If the client has a problem with my engagement letter, then I probably don't want them for a client.

You can always go get a copy of the H&R client service agreement as a starting point. While they don't try to limit reimbursement for penalties and interest (there are some timing restrictions, however), they do limit payout from their optional Peace of Mind to $5,000 (includes extra tax legally owed but not reported due to H&R error). And they require arbitration unless you opt out initially.
 

#16
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The best protection is to do good work with no mistakes that create liabilities.

That's true, but it's difficult sometimes. We're all human and we all make mistakes. I remember reading about a case where a business client sued their CPA--the client regularly hired veterans, and was eligible for the Work Opportunity Credit (I think that's the one), and the CPA missed the credit for several years. It was substantial, because the client would regularly hire several eligible employees from targeted groups in a single year. Many returns were past the statute and could not be amended to claim the credit.

The CPA's argument was that the client never once mentioned that he was hiring veterans, and the client's argument was that he never thought it was material, and the CPA should have told him that it was. I'm not sure if the client used an organizer, but we all know that many times the client doesn't even look at it.

Do all of you ask about all the General Business Credits as a matter of course? There's so many, it would be impossible for me to go over them all with every client. I'm just saying that negligence and bad work product are very different than simply missing a deduction, but both will leave you open to liability.
 

#17
Coddington  
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An even better example from the general business credit world is, following the Uniband case, how many of you addback credits for which the taxpayer was eligible but did not claim? (The gist of Uniband was that the addback is mandatory while taking the credit is elective.)
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 


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