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
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.
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.
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
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.
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:
will be designated as the partnership representative,
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,
should make decisions
related to new elections that will be available, the partnership representative or another
designated individual, and
new tax terms and concepts may require adjustment to partnership operating
e-file requirements and processes
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.
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.
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.
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.
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.
engagement letter processes
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.
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.
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
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.
client acceptance and continuance procedures
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
tax organizers to ensure that they fully address recent, complex areas of law, and
reporting requirements, such as:
obligations related to foreign activity, including the FBAR and the Foreign
Account Tax Compliance Act (“FATCA”), and
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.
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.
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.
Armor of Awareness to learn what each person at the firm can do to
protect client data.
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.
procedures based upon last year’s post tax-season wrap-up meeting to improve current
year processes for managing tax return preparation.
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.
to do during busy season
□ Schedule a pre-tax season staff meeting:
revised after last year’s post-tax season wrap-up meeting,
to the organizers, particularly those related to Tax Reform, Wayfair, FBAR and FATCA filing
obligations, and the sharing economy,
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),
firm’s tax practice quality control manual,
preparation process and procedures,
privacy and security policies including how to respond if a “phishing” email is
letter usage, including usage for tax planning, consulting and tax audit
applicable to taxpayers and preparers.
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
the importance of documenting discussions with clients.
□ Use a control log, common docketing system or
tax return tracking software to help avoid missed deadlines.
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.
the control log for responsible client parties.
the following information in the control log:
due date and extended filing due dates for each tax return,
additional information is requested or questions asked,
of client response(s) to additional information requested,
dates by preparers and reviewers,
by the firm and client, and
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.
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.
and monitor access to tax software and client tax returns to defined,
new forms issued by the IRS and instructions concerning how to enter
information in the software for the accurate completion of the forms.
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:
the prior year workpaper file and permanent file for each client.
up the current year file, update client profiles, and check data transferred
from last year's data files.
workpaper files with an index, checklists, and applicable notes from last
year's files, including net operating loss information, credits, carryovers, and
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.
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
□ 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
□ Plan for tax deadlines. As deadlines approach,
firm members may become overwhelmed and proper reviews may not be performed.
Consider the following:
Train staff to perform “tick and tie” reviews of
simple returns during the busy season;
o 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
Risk Related to Tax Reform, Deborah K. Rood, Journal of
Accountancy, September 2018
Alert: Wayfair is No Fair fora CPA Firm’s Professional Liability Risk,
Conflicts of Interest, Deborah K. Rood, Journal of Accountancy,
Armor of Awareness, Sarah Beckett Ference, Journal of Accountancy,
a Hike: Ending Client Relationships, Daniel J. Gartland, Journal
of Accountancy, February 2017
Your Data, Sarah Beckett Ference, Journal of Accountancy, August
Unexpected Risks of Trustee Services, Stan Sterna and Deborah K.
Rood, Journal of Accountancy, July 2016
the Talk on Quality Control, Deborah K. Rood, Journal of Accountancy,
Early CPA Gets the Return (Done on Time), Deborah K. Rood, Journal
of Accountancy, January 2016
Importance of Tax Quality Control, Deborah K. Rood, Journal of
Accountancy, April/May 2015
is Your Ally in Tax and Other Services, Deborah K. Rood, Journal
of Accountancy, July 2015
Let Scope Creep Lead You Out of Bounds, Sarah Beckett Ference,
Journal of Accountancy, September 2015
in Avoiding Becoming a Casualty in the Divorce Wars, Art Pearson
for CNA Accountants Professional Liability Risk Control, 2015
Diligence with CPA Firm Subcontractors, Joseph Wolfe, Journal of
Accountancy, June 2015
in the Middle: Avoiding Conflicts of Interest, CNA Accountants
Professional Liability Risk Control, 2014
This Client the Right Fit for Your Firm?,
Deborah K. Rood, Journal of Accountancy, July 2013
Knowing When to Walk Away, CNA Accountants Professional Liability
Risk Control, 2012
Termination Letters, CNA Accountants
Professional Liability Risk Control, 2013
- Preparing and Using Engagement
Letters and sample
engagement letters are available to CNA policyholders
- Risk Alert:
Tax Season Quality Control, 2015 IRS Updates and Tax Software,
CNA Accountants Professional Liability Risk Control, March 2015
- The tax quality control guide, Tax Quality Control:
A Risk Control Perspective is available to CNA policyholders
Practice Guides and Checklists, including sample engagement letters
and organizers, are available to CNA policyholders.
By Accountants Professional Liability Risk Control, CNA, 151
North Franklin Street, 17th Floor, Chicago, IL 60606.
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