Assisting taxpayers needing representation before the IRS demands that practitioners change their focus from their traditional role of independent advisor to the more lawyerly role of an advocate. Following an initial interview to learn of taxpayer’s IRS issues, best practices dictate spelling out the terms of the representation in writing by preparing an engagement letter.
Six Tips for Effective Engagement Letters
By Larry Lawler, CPA, EA, CTRS, NTPI Fellow
The engagement letter is the practitioner’s opportunity to eliminate unrealistic expectations. Troubled taxpayers often believe that engaging an experienced tax problem resolution professional is the end of their IRS problems. To the contrary, engagement of a representative is the initial step in resolving their IRS problems, which cannot be accomplished without their involvement and cooperation in the process.
The engagement letter should describe the following items, which will be addressed in the remainder of this article:
The nature of the services to be provided
The taxpayer’s responsibilities in solving their problem
The items and periods covered by the engagement
The level within the IRS the practitioner is responsible for
The fees taxpayer can expect and terms for payment
The situations that may result in termination of the case
1. The nature of services to be provided should be described as fully as possible.
- Review of documents provided by taxpayer,
- Review of IRS correspondence,
- File form 8821 to access IRS information,
- File Power of Attorney with IRS,
- Secure and review IRS transcripts,
- Evaluate situation and recommend solutions,
- Implement recommended solutions (Phase 2 of engagement)
2. The taxpayer’s responsibilities often include:
- Furnishing truthful and complete answers to our questions.
- Agreeing to furnish requested documents by mutually-agreed upon deadlines.
- Maintaining proper records that are substantially accurate.
- Safeguarding assets from harm or inappropriate loss.
- Deferring any IRS inquiries to us as your representative.
- Not meeting with or discussing your case with the IRS without us being present or providing in-advance agreement.
- Providing full and complete disclosure of assets, liabilities, income and expenses.
3. The items and periods covered by the engagement should state or exclude:
- Specific tax periods covered by this engagement, i.e. “all quarters of payroll taxes during 2015-2018” or “personal income tax returns for calendar years 2016, 2017, and 2018,”
- Specific services covered, i.e. “preparation of unfiled returns for 2016 and 2017” or “appearance and representation at the audit of your tax return for 2018” or the “request to abate failure to file penalties for 2016 and 2017.”
- Exclusions or limitations should be described, i.e. “Our services do not extend to earlier or later periods and do not include representation at IRS Collection Due Process or Collection Appeals Program hearings. Those would be the subject of a separate engagement letter.”
4. The level within the IRS the practitioner is responsible, or not responsible, for should be defined.
- We will represent you through and including initial administrative levels such as Revenue Agent, Revenue Officer, and Group Manager conferences.
- In the instance where elevating your case to a higher level is recommended and you agree to proceed therewith, a new engagement letter and added fees will be discussed.
5. The fees taxpayer can expect to be charged should be estimated in advance, the required terms for payment described, and the consequences for failure to meet the terms should be stated clearly.
- “Because of the limited number of cases a practitioner can represent at one time and that other cases are declined to accept client’s case, client understands and agrees that tax problem resolution fees are considered earned and not refundable at the beginning of the case”, or
- “Fees and charges are due in full upon presentation of our invoice”, or
- “Late payment will incur 1.5% per month in late fees,’’ or
- “Failure to pay fees as agreed will result in immediate suspension of services.” or
- “Fees not paid as agreed have a 10-day grace period, thereafter we will withdraw from representation without notice. Re-starting of services will only be considered after payment of previously billed amounts, payment of a $400 re-instatement fee, and a retainer against future services.”
- “Client agrees to pay all fees and expenses through the date of any early termination of services.”
6. The situations that may result in termination of a case include, but are not limited to:
- Acts that undermine our ability to provide proper representation to you or other clients,
- Undisclosed situations that make us have or appear to have a conflict of interest,
- Failure to fulfill the taxpayer responsibilities noted above,
- Failure to meet the deadlines to provide information,
- Failure to provide truthful answers to questions,
- Inappropriate attempts to delay the IRS,
- Meeting with the IRS on your own without our approval,
- Failure to timely remit the agreed upon fees.
Your engagement letter is a contract for services and in the event of a dispute will protect you and your firm from damage to both reputation and financial position. You may wish to require disputes be resolved by arbitration in your local area with both parties sharing expenses equally.
The engagement letter should also afford the opportunity to withdraw from any engagement that turns out to be or becomes undesirable.
Incorporate the tips in this article to craft a custom engagement letter. Compose your letter to state your firm’s policies clearly and avoid the wasted time inherent in avoidable disputes.
Download an example engagement letter
Larry Lawler, CPA, EA, CTRS, NTPI Fellow
Larry is the National Director of the American Society of Tax Problem Solvers (ASTPS). He has represented literally thousands of taxpayers before the Internal Revenue Service and is a frequent public speaker, a writer on professional topics, and a regular trainer of tax professionals nationwide. He has been a New York Certified Public Accountant since 1973. He is also a fellow of the National Tax Practice Institute. Larry is the managing partner of Lawler & Witkowski, CPAs, PC, the firm he established in 1973.