Tax planning engagement letter for individual clients (revised)

Update in September 2015: I am no longer using this letter. The new version is shorter, more segmented, and is in a format intended to be delivered by email and not on paper or PDF. The collaboration section is now simplified and changed.

I am working on updating and expanding my tax planning engagement letter for individual clients to encompass more complex planning situations. I’ve used a one page letter in the past but that no longer seems suitable especially for small business owners and professionals with multiple business interests. In this situation, more is better when it comes to communicating complex topics. Please consider that this engagement letter is a work in progress and that this blog post is published primarily for the purpose of seeking input from other professionals.

I don’t mind if anyone else uses the letter in whole or in part. Parts of the letter come from other professionals or were published in the public domain for the same purpose. As always, I appreciate comments and feedback.


Date, 2014



Dear xxxxxxxxxx:

I am pleased to offer my services for income tax planning including the preparation of a pro forma tax return for the calendar year 2014. This letter will confirm our understanding of the terms and objectives of this engagement and the nature and limitation of the services I will provide.

Pro Forma Tax Return

I will prepare a pro forma tax return based on information of the prior year’s tax return and estimates of the current tax year that you provide. The purpose of a pro forma tax return is to:

1) estimate your future federal and state income tax liability

2) allow us to test tax various planning proposals that may be considered using a “what if” approach to see their net impact on tax liability

3) identify the limitations posed by the interplay of different sections of tax law. For example, to identify the impact of the Alternative Minimum Tax on tax planning proposals or the different effects of state and federal limitations on deductions.

4) serve as the basis to lower the cost and time required to prepare the actual tax return filing. The cost of the actual return preparation may be less than the cost of the pro forma return.

To be most effective, a pro forma tax return should be prepared before the end of the tax year, the earlier the better.

I will depend on you to provide the information I need to prepare complete and accurate returns. I may ask you to clarify some items but will not audit or otherwise verify the data you submit. An Organizer is available to help you collect the data required for your return. The Organizer will be provided you’re your acceptance of this engagement proposal to help you avoid overlooking important information. By using it, you will contribute to efficient preparation of your returns and help minimize the cost of my services.

I will perform accounting services only as needed to prepare your tax returns. My work will not include procedures to find defalcations or other irregularities. Accordingly, my engagement should not be relied upon to disclose errors, fraud, or other illegal acts, though it may be necessary for you to clarify some of the information you submit. We will, of course, inform you of any material errors, fraud, or other illegal acts I discover.

The law imposes penalties when taxpayers underestimate their tax liability. Please call me if you have concerns about such penalties.

Should I encounter instances of unclear tax law, or of potential conflicts in the interpretation of the law, I will outline the reasonable courses of action and the risks and consequences of each. I will ultimately adopt, on your behalf, the alternative you select.

My fee will be based on the time required at standard billing rates plus out-of-pocket expenses. Invoices are due and payable upon presentation. To the extent permitted by state law, an interest charge may be added to all accounts not paid within thirty (30) days.

I will return your original records to you at the end of this engagement. I should securely store these records, along with all supporting documents, canceled checks, etc., as these items may later be needed to prove accuracy and completeness of a return. I will retain copies of your records and our work papers for your engagement in electronic format for at least seven years, after which these documents may be destroyed.

Our engagement to prepare your 2014 pro forma tax returns will conclude with the electronic delivery of the completed pro forma returns to you. No signature will be required on a pro forma tax return.

If you later select to have me e-file your returns with our office, you will be solely responsible to file the returns with the appropriate taxing authorities. Review all tax-return documents carefully before signing them.

To affirm that this letter correctly summarizes your understanding of the arrangements for this work, please sign the enclosed copy of this letter in the space indicated and return it to us in the envelope provided.

Objectives and Limitations

The objective of my engagement is to estimate your federal and state tax liability and prepare a reasonable basis to consider the impact of additional tax planning proposals that may be considered either before the year end or before the tax filing date.

Some tax planning measures must be implemented before the end of the tax year to be effective for 2014 so time is of the essence.

I will utilize information that is your representation without undertaking to obtain or provide any assurance that there are no material modifications that should be made to your financial statements and accounting records in order for the statements to be in conformity with general accepted accounting principles (GAAP) and applicable tax law.

You are responsible for:

  • The preparation and fair presentation of the financial statements and accounting records in accordance with GAAP and applicable tax law.
  • Presenting any forward-looking financial statements or projections that may affect tax planning.
  • Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements and accounting records.
  • Preventing and detecting fraud.
  • Identifying and ensuring that any included business entities comply with all applicable laws and regulations.
  • Making all financial records and related information available to me.

You are also responsible for all management decisions and functions, and for designating an individual with suitable skill, knowledge, or experience to oversee the services I am to provide. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

I am responsible for preparing the pro forma tax return as presented and as would be under various scenarios that we may consider and conducting the engagement in accordance with SSARs issued by the AICPA.

A pro forma tax return differs significantly from an actual tax return review or an audit of the financial statements. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents (for example, cancelled checks or bank images); or other procedures normally performed in an audit.

Accordingly, I will not express an opinion or provide any assurance regarding the financial statements being compiled.

This engagement cannot be relied upon to disclose errors, fraud, or illegal acts. However, I will inform the appropriate level of management of any material errors and of any evidence or information that comes to my attention during the performance of my compilation procedures that fraud may have occurred. In addition, I will report to you any evidence or information that comes to my attention during the performance of my compilation procedures regarding illegal acts that may have occurred, unless they are clearly inconsequential.

I have no responsibility to identify and communicate deficiencies in your internal control as part of this engagement.

This engagement is not meant to address tax liabilities other than the current year’s income tax. Specifically, this engagement will not consider wage tax issues, estate taxes or prior year tax issues.

Due Professional Care

A pro forma tax return does not meet the needs of other external users, who may require additional information and assurances on the tax return, internal control, and compliance with laws and regulations. You should consider whether additional testing of stated amounts and presentations, controls, and compliance are necessary to supplement the presentation of this information and to meet the reasonable needs of external users. These additional needs of external users are quite often met by:

An audit of financial statements conducted in accordance with Government Auditing Standards,

Supplemental (or agreed-upon) procedures, or

An examination of compliance or internal control resulting in an opinion.

If during the performance of my engagement I become aware that a pro forma tax return will not satisfy the requirements of all external users, laws, and regulations, I will notify you as soon as this comes to my attention. I will then submit another engagement letter for your approval that complies with the applicable requirements.

I am available to discuss the expanded needs of external report users, the nature of the expanded examinations, and the degree to which these type examinations, or other examinations, will meet the needs of the district and its report users.

Timing of Engagement 

It is my understanding that the accounting records will be available to me immediately. I anticipate that the engagement will commence no later than three days after the accounting records are provided and that the pro forma tax return will be returned to you no later than ten days after the accounting records are provided.

Reporting Package

My work product, referred to as the reporting package, will consist of the pro forma tax return including all schedules that are available at this time, one or more alternative pro forma tax returns as you may request reflecting one or more tax planning strategies. The details of the alternative pro forma tax returns are not known at this time but we expect that they may involve the inclusion of one or more tax-qualified retirement plans, non-qualified deferred compensations plan and transfer of ownership of business asset(s).

My explanation of any estimates used in preparing the pro forma return.

I will assist you in the preparation of the data collection form, management’s corrective action plan, if applicable, and the summary schedule of prior year findings, if applicable.


During the course of my engagement, it is possible that I may observe opportunities for economies of operation, for improved internal administrative and accounting controls, or I may observe variances with applicable laws and regulations or other matters that should be brought to your attention. My comments and recommendations concerning such matters, if any, will be conveyed to you in written form.

Prior Comments and Recommendations

My engagement will include a review of the prior year tax return. As to any current-year recommendations, suggestions, and/or comments, I will afford you the opportunity to respond to such matters and include your response in management’s corrective action plan.

Engagement Completion

At the completion of my engagement, I will send you one electronic copy of the pro forma tax return in pdf format.

If I find events subsequent to the issuance of my reports that would cause us to reissue the reports, I shall reissue the reports in the same fashion and to the same individuals and organizations as the original reports.


You will be notified immediately in writing if I withdraw from the engagement or if the engagement is cancelled, and will include all substantive reasons for the withdrawal or cancellation.

You will be notified immediately, in writing, if there are any changes in this agreement or if there are any restrictions placed on me during the engagement, to include failure to provide the appropriate books and records in a timely manner or denial of access to appropriate books and records, that would impact the scope of the engagement or the nature of the tests required under the previously discussed standards.


The fee for this service is $450, payable in advance.

This fee agreement is based on the assumption that you will provide assistance, anticipated cooperation from your personnel, and the assumption that unexpected circumstances will not be encountered during the engagement. If significant additional time is necessary, I will discuss it with you and arrive at a new fee estimate before I incur the additional costs. Any amendments to the not-to-exceed amount of the fees will be in writing and signed by both my firm and by you. My invoices for these fees will be rendered each month as work progresses and are payable upon presentation.

If you elect to have me e-file your actual tax return at a later date, the cost of that service will likely be less than would have been the case without the preparation of the pro forma tax return. The actual cost will be determined at that time based on the amount of additional work required and will be confirmed in a letter similar to this letter.

If a multi-year engagement is entered into, all outstanding invoices for work performed during any prior engagement will be paid in full before work commences on the current engagement.

Engagement Documentation

It is understood that my engagement documentation is confidential information. However, I will make my engagement documentation available to any successor auditor. I will follow the legal requirement regarding confidentiality of engagement documentation when giving access to engagement documentation to any parties other than those previously named individuals and organizations.

I will retain copies of the pro forma tax return and engagement documentation for at least five years.

Personnel and Privacy

I will personally handle all aspects of the engagement, and will exercise overall control and management of the engagement. I do not anticipate disclosing your information to any other person or entity or using any other personnel or subject matter experts at this time. If my work plan changes, I will notify you in advance in writing.

If I later recommend that my work should include the presentation of your personal, private or tax information to any other person or entity then this disclosure will be presented to you in writing and will not be attempted without your written approval.

Other Services

You may request that I perform additional services not contemplated by this engagement letter. If this occurs, I will communicate with you regarding the scope of the additional services and the estimated fees. I may also issue a separate engagement letter covering the additional services. In the absence of any other written communication from us documenting such additional services, my services will continue to be governed by the terms of this engagement letter.


I appreciate the opportunity to be of service to you, and believe that this letter accurately summarizes the significant terms of this engagement. If these comments and arrangements meet with your approval, please sign below and return the agreement to me.



I look forward to working with you.


Very truly yours,

Tony Novak




Accepted By:    






One response to “Tax planning engagement letter for individual clients (revised)”

  1. New paragraph to be added on outsourcing and collaboration per AICPA model language: “I may use third-party service providers in serving your account. I may share confidential information about you with these service providers, but remain committed to maintaining the confidentiality and security of your information. Accordingly, I maintain internal policies, procedures and safeguards to protect the confidentiality of your personal information. In addition, I will secure confidentiality agreements with all service providers to maintain the confidentiality of your information and I will take reasonable precautions to determine that they have appropriate procedures in place to prevent the unauthorized release of your confidential information to others. In the event that I am unable to secure an appropriate confidentiality agreement, you will be asked to provide your consent prior to the sharing of your confidential information with the third-party service provider. Furthermore, I will remain responsible for the work provided by any such third-party service providers.”

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