Documentation Tips for Tax Season

With the increasing complexities in tax law and regulations facing CPAs today in light of the Tax Cuts and Jobs Act ("Tax Act," "Act" or "TCJA"), which introduced the most significant changes to the U.S. tax system since 1986, it is even more difficult to stay current on risk management and loss prevention practices.

As showcased in CAMICO’s lead article titled, "A Review of Potential Risks Associated with the Tax Cuts and Jobs Act ("TCJA")", written by Art Pearson, J.D., L.L.M., tax practitioners are faced with the burden of how to address with their clients the implications of tax reform without putting themselves, or their firms, at risk. Good documentation is critical to successfully managing client expectations. Jurors (who are just members of the public) generally consider CPAs to be experts in documentation, and falling short of that expectation when faced with a liability suit may be viewed by the public as negligent and below the standard of care for the services rendered.

The following are some documentation tips to follow for tax season:

  • Always document significant meetings, communications and follow-up. Follow up with written communication in the following circumstances, such as:
    • Change in the scope of an engagement (may require a new engagement letter)
    • Negative information (e.g., tax return is already late, client’s failure to timely provide information, client is facing an audit)
    • Judgment calls (e.g., the former CPA took an aggressive position that client is aware of and has consented to)
    • Client needs to take material action on discussion
    • Conversations regarding transactions or amounts used for extension payments

  • Obtain written confirmation of the amounts used for calculations. For example, a confirmation can be sent to the client with the tax extension payment form, giving the client an opportunity to review the information and to change any information that appears incorrect, prior to April 15. The confirmation then serves as a record of the client’s representations in case the client incurs a late payment penalty.

  • If you need information at the last minute to complete a return, have the client send the data via email or fax. The email or fax becomes part of your records, support and documentation. Remind the client that their return may need to be extended if they fail to cooperate with the request.

  • Use informed consent letters in engagements such as S Corporation elections or conversions, estate tax planning, and aggressive or gray tax strategies, clarifying that the CPA advises and informs, while the client decides. With this letter, it is difficult for claimants to make it appear that the CPA made the decisions and is responsible for the results.

  • Aggressive or gray tax positions may call for the client to provide you with an opinion from tax counsel confirming that the position has a realistic possibility of being sustained on its merits if challenged. If you’re advising a client on a complex transaction or exchange, you may want to have your legal counsel review the documentation before passing it on to your client.

  • Documentation should be factual, professional, and without personal comments, which may be inappropriate and damaging to the integrity of the documentation. Ask yourself whether you or your client would be harmed if the documentation was presented to the “ladies and gentlemen of the jury."

More documentation guidance and tips can be found on the CAMICO Members-Only Site under Knowledge Tree —> Risk Management —> Documentation Issues.

Remember, be proactive, not reactive, as you work with your clients this tax season. It is important to recognize that you may have some clients that are no longer the "right fit" for your firm; disengaging from those clients may be in everyone's best interests in the long run.

Policyholders can always contact the CAMICO Loss Prevention department for more risk management advice and guidance as you navigate the challenges of this upcoming tax season. Call 1.800.652.1772, or email lp@camico.com.

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