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Pre-Tax Season Checklist

Professional Liability, Tax Services, Articles

Planning for the upcoming tax season is an important step in managing the professional liability risk associated with providing tax services. The following pre-tax season checklist provides several suggestions firms should consider in planning for this work. 

What to do now


Help clients prepare

 Inform clients of significant changes in tax law such as the Tax Cuts and Jobs Act (“Tax Reform”) and the South Dakota v. Wayfair, Inc. et. al. (Wayfair) Supreme Court decision through client newsletters. Need help getting started? The AICPA has created sample client letters related to these topics. Retain a distribution list of such communications, including the dates transmitted, in order to document that the client was informed of these changes.

□ Alert clients about other filing obligations such as Financial Crimes Enforcement Network (“FinCEN”) Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), state and local income tax returns, and the consequences of non-compliance.

□ Ask clients to schedule appointments to discuss items affecting their 2018 return prior to year-end. If a tax projection will be prepared or tax consulting will be performed, obtain a separate signed engagement letter for these additional services. Sample tax planning and tax consulting engagement letters are available to policyholders in the Policyholder Resource Center. Be specific about the scope of services. For example, “assess income tax aspects of changing from an S corporation to a C corporation in light of Tax Reform” is preferable to “explore Tax Reform’s impact on the business.”

□ Contact clients who have historically procrastinated providing their tax return information and consider providing incentives to them for early submission. Ideas on how to incentivize clients can be found in the article The Early CPA Gets the Return (Done on Time). In addition, provide these clients with deadline dates by which all information must be received. If information is not received by the designated date, consider terminating the client relationship. Not sure if it is time to terminate? Read the article Take a Hike: Ending Client Relationships for other items to consider.

 If your clients have not already addressed the proposed regulations that changed the partnership audit rules for partnership tax years beginning after December 31, 2017, advise them to do so. Clients should consult with their attorneys about revising partnership and limited liability company agreements in order to address these changes. AICPA Tax Section members may utilize the Letter to Advise Clients on Partnership Audit Changes as a starting point. Items that clients, with the assistance of their attorneys, should address in a revised partnership agreement include but are not limited to:

  • Who will be designated as the partnership representative,

  • Whether the IRS may collect any additional tax, interest, and penalties directly from the partnership at the highest individual tax rate or to take any adjustments into account from the partners in the reviewed year,

  • For eligible partnerships, whether or not to elect out of the new partnership audit regime,

  • Who should make decisions related to new elections that will be available, the partnership representative or another designated individual, and

  • Which new tax terms and concepts may require adjustment to partnership operating agreements.

Review e-file requirements and processes

  Research mandatory e-filing requirements for federal and state tax returns. Preparers who          file 11 or more U.S. individual or trust returns are required to use e-file.

 Review the information currently on file with the Internal Revenue Service (“IRS”) authorizing

      the firm as an IRS e-file provider, or register as an e-file provider with the IRS. If information        on file with the IRS has changed in the past year, update it or reapply as a new e-filer.

Train professional and administrative staff on firm e-filing processes. Submit completed returns electronically only upon receipt of both the signed e-file authorization forms and an e-mail acknowledging review and approval of draft returns from the client. Retain the e-mail acknowledging the client’s approval of the return in the workpaper file and the e-file authorization form in an administrative file. When filing electronically, save acknowledgments from the IRS or other tax authorities indicating return acceptance, not just receipt, for the required three years.

Inform clients both in the client engagement letter and cover letter sent with the tax organizer that returns will be filed electronically, and that clients will be required to review and approve draft returns prior to such filing. Signed copies of e-file signature authorizations, e.g., Form 8879, IRS e-file Signature Authorization and equivalent state forms, must be received before tax returns may be filed electronically. Both spouses must sign the engagement letter and e-file authorization form if a joint income tax return is filed.

 Obtain a signed Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350 or equivalent state form, prior to filing an application for an extension of time to file.

Update engagement letter processes

  Review engagement letters used in the prior year and update, as needed. Sources of sample engagement letters include your professional liability insurer, the American Institute of Certified Public Accountants (“AICPA”), and paid providers. CNA’s sample engagement letters are available to policyholders in the Policyholder Resource Center.

  Emphasize engagement letter usage for all tax services, including tax planning, tax consulting and tax audit representation services. In 2017, approximately 43% of the tax claims in the AICPA Professional Liability Insurance Program reflected a failure to utilize an engagement letter. While CPAs may be diligent about obtaining engagement letters for compliance services, experience demonstrates they are less conscientious when providing high risk tax services such as audit representation, planning and consulting services. A single engagement letter may not suffice for a client that engages the CPA firm for multiple services.

  Review firm policy on issuing engagement letters. While obtaining signed engagement letters is always the preferred risk control practice, unilateral engagement letters sent with tax organizers may be more practical for low risk individual tax return preparation engagements. A unilateral engagement letter requires signature only by the CPA firm. The client indicates its acceptance with the firm’s terms and conditions by returning the organizer and providing other tax information to the CPA firm. A sample unilateral engagement letter is included in the Policyholder Resource Center.

 Inform clients that the firm will not begin preparing tax returns until the retainer fee is paid, if requested, and a signed engagement letter is received, or in those cases where a unilateral engagement letter is sent, the completed and signed tax organizer is received.

Review client acceptance and continuance procedures

Review the firm’s client list from the prior tax season. Consider terminating the firm’s professional relationship with unprofitable, high risk and "problem" clients, such as those who do not provide information in a timely manner. The article, Clients: Knowing When to Walk Away identifies other factors to consider when deciding whether or not to continue a client relationship. If you’re still not sure, read Take a Hike: Ending Client Relationships for other considerations. If the decision is made to terminate the client, Client Termination Letters explains the importance of written termination letters and what to include in such a letter.

  Identify high risk clients, such as clients creating a potential conflict of interest for the firm. Review the articles Managing Conflicts of Interest and Considerations in Avoiding Becoming a Casualty in the Divorce Wars. Need more? Watch the webinar Stuck in the Middle: Avoiding Conflicts of Interest for additional suggestions. Establish protocols to address potential conflicts of interest that arise during tax season.

Update the firm’s client acceptance checklist and conduct due diligence on prospective clients, such as inquiring why they are changing accountants and conducting an internet search on the prospect. Request the prospect’s consent to contact the predecessor accountant. Consider obtaining a retainer fee from all clients, or, at a minimum, new and customarily slow-paying clients, as a condition of engagement. Our article, Is This Client the Right Fit for Your Firm? includes other criteria to consider in balancing the risks and rewards of continuing a relationship with an existing client or accepting an engagement with a prospective client.

Prepare the firm

 Research state law regarding registration requirements for the firm and tax return preparers. Registration and licensing requirements vary by state and some states charge registration fees. Renew or register with the states that have registration requirements.

Renew existing preparer tax identification numbers and register new tax return preparers with the IRS. Any firm member who will prepare all or substantially all of a federal tax return must be registered, regardless of whether or not the member signs the return as the preparer.

Update the firm’s tax quality control, and policies and procedures manuals. If you do not have a tax quality control manual, consider creating one to provide guidance whenever tax services are provided. CNA policyholders have access to the AICPA Tax Practice Quality Control Guide in the Policyholder Resource Center.

Review the firm’s controls pertaining to confidential client information. Emphasize that firm policies regarding management and use of client information should not be bypassed due to tax deadlines. Consider updating your policies for new risks. Not sure where to start? Controlling Your Data and IRS Publication 4557, Safeguarding Taxpayer Data: A Guide for Your Business are good resources.

Review the firm’s planned response to a data security incident, including its cyber liability insurance coverage. For tips on how to respond if a data security incident occurs, read A Breach of Client Data: Risks to CPA Firms.

 Review tax return volume from the prior season and staffing requirements for the upcoming season. Be alert for bottlenecks that may arise, such as too many staff and an insufficient number of reviewers. Explore using data scan software when planning staffing requirements.

Initiate contact with independent contractors who assisted last tax season, determine their availability, and reach an agreement regarding such issues as hours and fees. Determine if additional temporary staff will be required and initiate a hiring search. Perform due diligence before hiring new independent contractors or temporary staff. For guidance, read the article Due Diligence with CPA Firm Subcontractors. Consider applicable AICPA ethics interpretations and Treasury regulations.

Review tax organizers to ensure that they fully address recent, complex areas of law, and reporting requirements, such as:

o   Tax Reform

o   Wayfair

o Filing obligations related to foreign activity, including the FBAR and the Foreign Account Tax Compliance Act (“FATCA”), and

o   The sharing economy, including income from home rentals, driving services, or other peer-to-peer services. If you are not conversant with the tax implications of the sharing economy, read Short Term Rentals, The Sharing Economy and Tax.

If organizers do not adequately address such issues, consider supplementing them with additional questions or specifically addressing them in documented conversations with clients.

Help staff prepare

Provide a training plan for staff and independent contractors, concentrating on changes in local, state, and federal tax laws, including Tax Reform and those related to new and expiring tax provisions. Include a timeline for completion. Consider separate training tracks for staff, managers, and partners, whose responsibilities regarding tax return preparation may differ.

Train all firm members on the importance of protecting client data, both physical and electronic, at all times, and especially during this busy time of the year. Read The Armor of Awareness to learn what each person at the firm can do to protect client data.

Review library resources and training materials and ensure that up-to-date resources are available to staff. Verify that staff has access to electronic tools and databases used as reference materials.

Revise procedures based upon last year’s post tax-season wrap-up meeting to improve current year processes for managing tax return preparation.

Remind the tax department to amend engagement letters for changes in scope. For a refresher on how scope creep can be detrimental to the firm, read Don’t Let Scope Creep Lead You Out of Bounds.

What to do during busy season

    Schedule a pre-tax season staff meeting:

o   Review:

§  Procedures revised after last year’s post-tax season wrap-up meeting,

§  Changes to the organizers, particularly those related to Tax Reform, Wayfair, FBAR and FATCA filing obligations, and the sharing economy,

§  Applicable professional standards including:

·       the AICPA Statements on Standards for Tax Services,

·       the AICPA Code of Professional Conduct, and

·       U.S. Treasury Department Circular No. 230 (Rev. 6-2014),

§  The firm’s tax practice quality control manual,

§  Tax preparation process and procedures,

§  Firm privacy and security policies including how to respond if a “phishing” email is received,

§  Engagement letter usage, including usage for tax planning, consulting and tax audit representation services,

§  E-filing procedures, and

§  Penalties applicable to taxpayers and preparers.

o   Review the most frequent errors found by reviewers on prior year individual and business income tax returns. Remind preparers to exercise due diligence in compiling and assembling tax information, and to communicate clearly with clients about any concerns, and

o   Emphasize the importance of documenting discussions with clients.

 Use a control log, common docketing system or tax return tracking software to help avoid missed deadlines.

o   Include all tax returns and related forms, such as estate tax returns, those related to minor children, unfunded trusts, foreign financial accounts, foreign earned income, and state filings, even if the client falls below the filing threshold in the current year.

o   Update the control log for responsible client parties.

o   Memorialize the following information in the control log:

§  Original due date and extended filing due dates for each tax return,

§  Information receipt date,

§  Date(s) additional information is requested or questions asked,

§  Date(s) of client response(s) to additional information requested,

§  Completion dates by preparers and reviewers,

§  Approvals by the firm and client, and

§  Assembly, delivery, mailing, filing and acceptance dates.

  Test new or updated tax software to ensure that it is working properly and test integration with other applications.

o   Check the software website for updates and downloads throughout the tax season. Determine if any programming errors noted last year or earlier in the tax season have been corrected.

o   Restrict and monitor access to tax software and client tax returns to defined, authorized users.

o   Review new forms issued by the IRS and instructions concerning how to enter information in the software for the accurate completion of the forms.

o   Train all tax professionals on the use of the software, new capabilities and the most efficient way to use the programs.

 Assign clients/tax returns to preparers and reviewers based upon their experience and training. Consider having each preparer:

o   Review the prior year workpaper file and permanent file for each client.

o   Set up the current year file, update client profiles, and check data transferred from last year's data files.

o   Organize workpaper files with an index, checklists, and applicable notes from last year's files, including net operating loss information, credits, carryovers, and so forth.

o   Check tax form instructions for changes in tax laws or regulations, changes to tax forms, and additional forms to file.

o  Check descriptions, formats, and formulas in document templates created from support schedules for the prior year and update them for necessary changes. Notably, professional liability claims may arise from mathematical errors due to incorrectly updated spreadsheets.

o   Identify clients that have undergone significant change (e.g., client’s altering terms of debt may result in cancellation of debt income) or that will be significantly affected by Tax Reform and other tax law changes implemented or expiring in 2018. Schedule a meeting with the assigned partner/manager to discuss the impact of the change (e.g., application of Internal Revenue Code §199A, changed filing status, preparation of returns declaring foreign or out-of-state income).

   Review client data promptly when received, making inquiries if any information appears to be incorrect, incomplete, or inconsistent, and document discussions with clients. Awkward situations may arise when information that the CPA has had for months is not reviewed until close to the deadline, and either required information is missing or additional information is requested.

   Use IRS e-services to verify estimated tax payments made by clients in past and current years by submitting transcript requests via the IRS Transcript Delivery System. Many states provide firms with a similar ability to verify state payments.

   If a procedure is not working, change it. Procedures were designed to accomplish certain tasks in an efficient manner. If such efficiency is not being achieved and a better idea has been proposed, try it.

   Plan for tax deadlines. As deadlines approach, firm members may become overwhelmed and proper reviews may not be performed. Consider the following:

o    Train staff to perform “tick and tie” reviews of simple returns during the busy season;

Review information from the client upon receipt and follow up with the client in writing if information is missing or incomplete;

o  If the final information required to complete the return is minor and will not be received until close to the deadline, consider preparing an initial draft return, including review and filing for an extension early; and

o  Be prepared for phishing emails. When CPAs are tired and stressed, they are more likely to click on an infected link or open an attachment that contains a virus.


All tax work should be routinely monitored to help prevent errors, and in turn, professional liability claims. Most tax-related professional liability claims arise from inadequate review of client data and completed returns, rather than inadequate training.

Tax season is busy, so preparing for it now will reduce the stress experienced January through April and help reduce exposure to professional liability risk. Pre-tax season training of personnel and proactive review of administrative procedures will improve efficiency through April 15th and beyond.



October 2018

By Accountants Professional Liability Risk Control, CNA, 151 North Franklin Street, 17th Floor, Chicago, IL 60606.

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