An engagement letter is the document that says what you will do for a client, what they must do for you, and what happens if things go wrong. Federal rules do not generally require one for individual return preparation, but it is standard practice, and it is the first thing you will wish you had when a client disputes a fee, says you missed a deadline they never gave you the documents for, or asks you to "just look at" a notice from three years ago.
Scope: what is and is not included
- Which returns and which years. Name the tax year and the forms (for example, Form 1040 and the state return), not just "taxes."
- What is excluded. Audit or notice representation, bookkeeping, amended returns, back-year filings and tax planning are separate work unless you say otherwise.
- What you are relying on. State that you prepare the return from information the client provides and that you do not audit or verify it.
Fees and payment
- How the fee is set (flat, by form or hourly) and what can change it, such as extra schedules or late documents.
- When payment is due: before delivery, on delivery or on a schedule.
- What happens to unpaid balances, and whether you hold the finished return until you are paid.
What you need from the client, and by when
- The client is responsible for providing complete, accurate information and all documents.
- A deadline for sending documents, and what happens if it is missed: an extension, a later delivery date or a higher fee.
- The client's duty to review the return before signing and to tell you about errors.
- That you need their signature on the e-file authorization (Form 8879) before you transmit the return.
Data, privacy and consent
- How you will receive and store documents and communicate (a secure portal, not email attachments).
- Consent where the law requires it. If you will use or disclose a client's return information for anything beyond preparing their return, such as marketing or sending work to a provider outside the US, IRC section 7216 and its regulations require specific written consent.
- How long you keep records, and that the client should keep their own copies.
Ending the relationship
- Either party may end the engagement in writing, and what is owed up to that point.
- That the engagement ends when the return is delivered or filed, and does not cover later notices unless renewed.
Make it easy to sign, and keep it
A letter nobody signs protects nobody. Send it before work starts, let the client sign electronically, and keep the signed copy with the client's file. VYAX includes an engagement letter flow on every plan: how it works. Have an attorney review your template for your state, because rules on limitation of liability and disclosures vary.
This article is general information, not legal or tax advice. Rules vary by state and situation.