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Documentation Tips for Tax Season

The COVID-19 pandemic has added new complexities for tax practitioners, given the magnitude and constant state of flux with many of the economic and tax-specific relief measures put into place by regulatory and legislative bodies to combat the detrimental impacts of this pandemic on people and the economy. The relief measures are much needed but impose burdens on tax practitioners trying to help clients understand and benefit from the newly available programs and tax measures (credits, deferrals, etc.). Good documentation is essential to successfully managing the related risk exposures.

Here are some documentation tips for managing those risks:

  • Document all significant meetings, communications and follow-up. Follow up with written communication detailing:
    • Change in the scope of an engagement (may require a new engagement letter)
    • Negative information (e.g., inconsistencies with promulgated Paycheck Protection Program rules, tax relief state conformity issues, the changing landscape regarding the application and eligibility for COVID-19 relief measures)
    • Client Assumptions and Decisions (e.g., the client’s decision regarding taking the Employee Retention Credit and/or loan forgiveness under the Paycheck Protection Program)
    • Significant steps the client should take based on discussion (e.g., consult with legal counsel)
    • Transactions or amounts used for extension payments
  • Obtain written confirmation of the amounts used for calculations. For example, request clients confirm significant amounts, estimates and transactions used to determine the extension payment requested, giving the client an opportunity to review the information and to question or change information that appears incorrect, prior to April 15. The confirmation serves as a record of the client’s representations were a late payment penalty imposed.
  • If you need information at the last minute to complete a return, have the client upload the information directly to your secured portal, or send the data via email or fax so that the information (and time received) becomes part of your records, support and documentation. Remind the client that you need the requested information by a specified date to be able to complete the returns by the deadline and that the client will be solely responsible for any penalties and interest associated with the late filing were the information requested not be received by the date requested.
  • Use informed consent letters in engagements that have different tax alternatives available to the client (e.g., estate tax planning). A well-written informed consent letter clarifies 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 are advising a client on a complex transaction or exchange, consider having your tax legal counsel review the documentation before passing it on to a jury.
  • 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.”
  • Be proactive, not reactive, as you work with clients during tax season. 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.

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