Tax Engagement Letters Top Tips Part 2

by John McCarthy Consulting Ltd. | Jun 12, 2026 | Blog, News

Part one of this two-part blog appeared last week where we looked at how best to tighten the language used in tax and other engagement letters to help minimise liability and improve communication with clients.

Below we discuss the main elements of the improved additional wording that might be inserted into tax engagement letters. The points discussed may be applied to all types of engagement letter, with minor tweaks.

Exclusion clause. Because tax services can be broad, an exclusion clause that identifies what services will not be provided is invaluable. For example, a payroll taxes preparation engagement might exclude subcontractor tax and VAT compliance.

Deadline for submitting return information. Clearly state the deadline by which the client must provide the information needed to prepare the tax return.

Limitation on use of the returns. Clients may submit tax returns and/or supporting data (like rental income computations) to named third parties in lieu of a financial statement. It is essential to limit potential liability by naming those third parties and include a clause limiting the circulation of tax returns, supporting data and distribution and/or requiring advance written permission before allowing the client to circulate the information to those named third parties.

Tax position clauses. Often it can happen that clients think a certain approach is acceptable, but this may often conflict with professional standards. Include language stating that tax positions taken must satisfy professional and ethical standards.

Supporting documentation. Because a Revenue Audit or investigation is always a possibility, remind clients of their responsibility to maintain adequate records to support the deductions claimed on the return. Include in the letter a reminder of the length of time for which the records should be maintained.

Revenue Audit or Investigation. Representing a client in a Revenue Audit may be more involved than the tax return preparation itself, for which many accountants may want to deal in a different manner to the main tax assignment e.g. by allowing for the use of specialist advice. The engagement letter should state that in the event of a Revenue Audit or Investigation, the assignment will be covered by the terms of a separately signed engagement letter.

Outcome or results. The engagement letter is not a marketing device. Never guarantee the outcome or results.

Limitation of liability.  Ensure such clauses are used appropriately.

Complaints/best service. Make it clear what the lines of communication are, in the event of a dispute or claim (by giving the contact name for the Partner/Director in your organisation that will primarily handle client complaints) and in the event of failure to reach a satisfactory outcome give the contact details of your professional body.

If you need an up-to-date engagement letter, there is a search bar near the bottom of our home page (www.jmcc.ie) to quickly look up the item you need. More details see here.

For those of you still in the process of ISQM 1 implementation, please see our ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie.

We typically tailor our training and brainstorming sessions to suit each firm’s unique requirements.

Publications:

• • The ISQM TOOLKIT 2022 is available to purchase here.
  • See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.

Tax Engagement Letters Top Tips

by John McCarthy Consulting Ltd. | Jun 7, 2026 | Blog, News

Tightening the language used in tax and other engagement letters will help limit your professional liability. This is part one of a two-part series of blogs on tax engagement letters.

 Accountancy firms are taking a renewed interest in having well written and up to date engagement letters. In this blog we outline the fundamentals of best practice in tax engagement letters, and we suggest provisions that will help minimize legal liability faced by accountants in practice.

Professional liability insurers and defence solicitors will often agree that engagement letters are one of the first lines of defence in a professional negligence claim against an accountant. When drafted properly, engagement letters form the basis for an enforceable contract and should contain:

• caveats unique to the scope of the service provided
• state the amount of risk inherent in the engagement, and
• ensure that professional standards are met.

Over the years, in our experience, the majority of claims (by frequency) reported by leading professional indemnity insurers arise from tax services, yet individual tax engagements are where engagement letters are hardly ever used.

General Principles for all Engagement Letters

The following ten general principles apply to almost all types of engagement letter.

1. Address the letter to the appropriate parties in a formal introductory paragraph.
2. Exclude any taxes not within the scope of the tax return
3. Exclude other entities owned by the individual tax client, if dealt with elsewhere.
4. Include the appropriate year or years that are being prepared.
5. Identify which returns are being prepared, and do not combine multiple returns. (For example, do not include a gift tax return service with an income tax return unless the proper disclaimer language for a gift tax return is included.) The following language is highly recommended.

‘We will prepare your [Year] income tax return. This engagement pertains only to the [Year] tax year, and our responsibilities do not include preparation of any other tax returns that may be due to any tax authority. Where we receive specific instructions from you about other taxes or other tax years, these assignments will be the subject of separate engagement letters. ‘

6. Deal with the price of the service, payment terms, retainers, additional charges for information received late, additional fees.
7. Clarity and diligence must be adhered to, as many professional liability lawsuits, professional body ethical complaints, and loss of clients have resulted from misunderstanding these provisions. Too often, a phrase like the following is used in a standard letter:

‘Our fee for services will be at our standard hourly rate for the personnel assigned to this engagement [or fixed fees to cover other than hourly fee arrangements]. Payment is expected when our services are complete.’’ This is far too vague and uncertain.

8. The following improvements to the wording will help a lot:

• Specify more clearly the payment terms.
• If you wish, stipulate that a retainer will be required and will be applied toward the final fee and that the retainer is not an estimate of the fee charged for services.
• Identify when payment is expected.
• Provide for a termination of services if the fee is not paid in full.
• Use an additional charge clause for services not originally contemplated.
• Include a provision for reimbursement for out-of-pocket expenses such as travel, registered delivery, etc.

9. Use a tax checklist that is sent to clients. The value of tax checklist in defending a professional liability claim cannot be overstated. However, many tax advisers complain that their clients do not complete the checklist and often return it unopened.

 Accountants and tax advisers need to get the client to take responsibility for completing the checklist. The language used in the engagement letter should establish this responsibility:

‘We will prepare the returns from information which you will furnish to us. It is your responsibility to provide all the information required for the preparation of complete and accurate returns. We will furnish you with questionnaires and/or worksheets as needed to guide you in gathering the necessary information. Your use of such forms will assist us in keeping our fee to a minimum. To the extent we render any accounting and/or bookkeeping assistance, it will be limited to those tasks we deem necessary for preparation of the returns’.

10. AI – include an appropriately worded paragraph in the letter of engagement informing clients about the potential use of artificial intelligence in carrying out tax assignments. All our template engagement letters on the website have been updated with such a paragraph about AI.

More next week on the style of improved wording that a tax engagement letter might contain.

If you need an up-to-date engagement letter, there is a search bar near the bottom of our home page (www.jmcc.ie) to quickly look up the item you need. More details see here.

For those of you still in the process of ISQM 1 implementation, please see our ISQM TOOLKIT or if you prefer to chat through the different audit risks and potential appropriate responses presented by this new standard, please call or e-mail John McCarthy FCA or e-mail him at john@jmcc.ie.

We typically tailor our training and brainstorming sessions to suit each firm’s unique requirements.

Publications:

• • The ISQM TOOLKIT 2022 is available to purchase here.
  • See our latest Anti-Money Laundering Policies Controls & Procedures Manual (March 2022) – View the Table of Contents click here.
  • To ensure your letters of engagement and similar templates are up to date visit our site here where immediate downloads are available in Word format. A bulk discount is available for orders of five or more items if bought together.