I regularly work with CPA policyholders to manage professional liability risks that may lead to malpractice claims. I recently attended a state CPA society meeting and participated in a spirited discussion related to the Tax Cuts and Jobs Act (TCJA or “tax reform”). During the discussion, one of my peers turned to me and asked, “Deb, as a risk management professional, what should I tell my clients about tax reform?”
The two primary risks I anticipate concerning tax reform are:
- Failure to advise a client about potential tax savings opportunities presented by tax reform whereby the client asserts that too much tax was paid
- Providing incorrect advice regarding implementation of tax reform
Luckily, CPAs can establish protocols which may help mitigate those risks.
Know the law.
CPAs will, of course, need to know and understand the law and other guidance so they may competently provide advice. CPE courses should be taken to help understand the many implications of tax reform. With additional guidance being added daily, remaining current is vital.
Inform your clients.
Consider sending your clients a newsletter or email with a high-level overview of changes related to tax reform.
Want to do more? Consider hosting a seminar for your clients, giving them an overview of key components of the legislation. Leverage the AICPA sample presentations for individuals and businesses to save you time.
Put the responsibility on the client to contact you regarding tax reform planning opportunities specific to their situation. Retain the newsletter distribution and seminar attendance lists, just in case a client later contends that “you didn’t tell me about tax reform.”
Mitigate risk; obtain a new engagement letter.
Undoubtedly, tax reform will generate new business opportunities. When new services are requested, you should obtain a new engagement letter.
Advice related to tax reform is not part of a tax compliance engagement. It’s tax consulting and needs its own engagement letter. A sound tax consulting engagement letter will:
- Define the scope of services with specificity, for example, “research whether certain activities of XYZ partnership qualify for the qualified business income deduction.”
- Describe the deliverable. If a memorandum or spreadsheet will be provided, say so and describe how the advice will be structured.
- State that the advice will be based upon the Internal Revenue Code, regulations and other applicable guidance as of the date of the advice and disclaim any future responsibility to update the advice.
- State that the client is responsible for implementing planning strategies. If the client engages your CPA firm to help with implementation, an additional engagement letter should be secured.
AICPA Tax Section members have access to the Annual Compliance Kit which includes a sample tax consulting engagement letter. Learn more about how engagement letters can help — and sometimes hurt — here.
Document the client’s options, ramifications and decisions.
The law is not comprehensive and IRS guidance has been, at best, limited. As a result, there may not be clear answers to many tax reform planning opportunities. If there is more than one option available to the client, identify each option and the potential ramifications so that the client may make an informed decision. While a client may expect you to provide a recommendation regarding tax reform opportunities, the final decision will be the client’s choice.
Your analysis, recommendations and the client’s decision, including rationale, if known, should be documented. The formality of the documentation depends upon the impact of the advice. For example, guidance related to revoking subchapter S status would typically result in a more formal memo than describing general changes to Sec. 179 and bonus deprecation.
Speaking of documentation, let’s talk about informal advice.
Ideally, every client would formally engage you to provide tax consulting services. However, clients will often request advice through a quick phone call or other informal discussion.
These interactions can be as risky as providing formal advice — sometimes even riskier! Why? Because thorough research may not be conducted, client-specific facts may not be reviewed and conversations may not be documented. When a client makes a costly decision based on incomplete advice, the CPA may become the target of a claim.
How do you mitigate this risk? Documentation.
After an informal conversation, send a follow-up email summarizing the discussion. Ask the client to contact you if formal advice (upon which they can rely on) is sought. If engaged, document these additional services in a new engagement letter.
Tax reform: seize the opportunity.
Tax reform has and will continue to present business opportunities for CPA firms. As with any service a CPA provides, risk also exists. By learning about tax reform and preparing appropriate documentation, including engagement letters, CPAs will be in a stronger position to mitigate these risks.
Deborah K. Rood is a Risk Control Consulting Director for the Accountants Professional Liability Insurance Program of Continental Casualty Company, a CNA company and the underwriter of the AICPA Professional Liability Insurance Program. She previously practiced public accounting for 19 years with regional public accounting firms as a state and local tax practice leader. Deborah has provided consulting and compliance services to clients in a variety of industries including but not limited to manufacturing, distribution, professional services and transportation. She is also actively involved in the AICPA and state CPA society conferences and has authored numerous articles.