Minimizing the risks in taking on new clients.

One of the major problems facing tax practitionersand many other individualsthese days is litigation, whether actual or threatened. The costs of defending oneself and ones practice, as well as the insurance costs of protecting that practice, are ever-increasing. To remain in business and be successful, a tax practitioner must make a strong effort to manage this risk.

One basic way in which CPAs can lessen their risks is by evaluating individuals and businesses on the likelihood of litigation before doing work for them. This process begins at the start of a CPAclient relationship (if there is to be one); a practitioner must carefully examine the risks and benefits before deciding to become associated with a particular client.

Client Evaluation Process
Obviously, entering into a relationship with any client can involve some degree of risk. By the same token, most client arrangements do not end up in court or under the threat of litigation. However, CPAs may need to carefully evaluate some perspective clients to ensure the rewards outweigh the risks of working with them.

The most important element the CPA should consider is the prospective clients integrity. Reputable clients are more likely to be open, accessible and easy to work with. Such clients are likely to pay their bills on time and work out potential differences in an amicable fashion.

Practitioners must also consider other risk factors: the prospective clients financial condition; the clients level of tax and business sophistication; business conflicts (or other conflicts of interest); the level of cooperation anticipated from the client and the ease of obtaining necessary information; and whether the practitioner has the adequate resources, skills and experience to serve the client competently.

Taking on a New Client
Engagement letters. Once the CPA decides to provide services for a client, the key to the relationship is communication through the engagement letter. That document should go a long way toward preventing confusion or miscommunication leading to problems.

The engagement letter establishes the relationship between the CPA and the client; it sets forth the specific terms and conditions of the engagement and delineates the scope of the practitioners responsibility and the other parties respective obligations.

A well-crafted engagement letter should

  • Identify the objectives of the engagement and the form of any reports or opinions to be issued.

  • Set forth the clients responsibilities.

  • Include the type of fee arrangement and the specific rates or amounts to be charged. It also may be appropriate to specify the engagements duration or the dates by which the work product will be delivered.
  • Fix the responsibilities of other professional advisers who are providing services that may overlap the practitioners work.
  • Identify the specific tax services being provided (and, if appropriate, those not being provided).

If an engagements scope changes, the practitioner should send a letter confirming those changes. If the CPA declines an engagement or if a client rejects a recommended course of action, the CPA should send a letter verifying such actions.

Communications during the engagement. It is important that the CPA document for the client all significant advice given, preferably in writing. In addition, it takes little effort (and is a good practice) to copy clients on communications sent to third parties (such as the Internal Revenue Service). It also is prudent to advise the client in writing of all significant filing deadlines and to obtain the clients consent to file extensions, elections and refund claims.

If a client has several options, the practitioner should document the reasons why the client ultimately chose one course of action over another. Likewise, the client should be advised in writing when return positions have a significant chance of being disallowed or when penalties may apply. It is also a good idea to document a recommended course of action or a tax planning measure the client has rejected.

For a discussion of the many issues in this area, see A Tax Practitioners Guide to Risk Management, by Lawrence Hill, in the February 1998 issue of The Tax Adviser .

Nicholas Fiore, editor
The Tax Adviser


©1998 AICPA


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