Tax planning engagement letter: advice, projections and the limits of written advice
By Arthur Teboul, DokuTrak · Published
In brief
A tax planning engagement letter covers advice on future transactions, not the return itself: the strategies in scope, the facts and assumptions the advice rests on, and the date the law is read as of. It also says who acts on the advice and whether you will update it when the law changes.
The template: Tax planning engagement letter
Tick the planning areas in the scope clause, attach the assumptions schedule to each memo and keep return preparation in its own letter. Have your own counsel review the template before first use.
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[Firm name] [Firm address] [Date] [Client name(s)] [Client address] Re: Tax planning for [tax year or transaction]
Dear [Client name(s)],
What this engagement is
[Firm name] will give you tax planning advice for [tax year or transaction]. This is advice about future steps. It does not include preparing or filing any return, which we cover in a separate letter.
Entities in scope(optional)
Our advice covers you and the following related entities: [S corporation name], [partnership name], [trust name]. It does not cover any other entity unless we add it in writing.
Planning areas
We will advise on the areas ticked: [ ] current-year tax projection; [ ] estimated payments; [ ] choice of business entity; [ ] retirement contributions; [ ] equity compensation; [ ] real estate transactions; [ ] charitable giving; [ ] state residency; [ ] estate and gift planning. Areas not ticked are outside this engagement.
What you will receive
We will deliver a dated written memo with our projections and recommendations by [date]. If you plan to rely on advice we give in a meeting or by phone, ask us to confirm it in writing first.
Facts and assumptions
Our advice will rest on the facts you give us and on the assumptions listed in the schedule attached to each memo, such as your expected income, filing status and state of residence. Please check the schedule and tell us at once if any item is wrong or changes. We will not audit the information you provide, but we will ask about anything that looks incomplete or inconsistent.
The law we apply
Each memo reflects federal and [state] tax law as in force on its date. Later changes in law, regulations or court decisions may affect it. We will tell you about such changes only if updates are included below or you engage us separately for them.
Updates(optional)
This engagement includes [number] follow-up meetings and [one] update to the projection before [date]. Further updates are billed at the hourly rates below.
Who acts on the advice
You make the final choice on each recommendation and are responsible for carrying it out, with your attorney, financial adviser or other professionals as needed. We will help with implementation only where this letter or a later addendum says so.
What we need from you
By [date], please send: your prior-year federal and state returns; year-to-date pay stubs for each earner; expected Schedule K-1 figures from each business; a realized gain and loss report from each brokerage account; and a list of estimated payments made so far this year.
Sharing with your other advisers(optional)
With your written consent, given separately from this letter, we may share our memo and your tax information with the attorney and financial adviser you name: [names].
No promise of savings
We will give you our best professional judgment. We cannot guarantee any amount of tax savings, that the IRS or a state will accept a position, or that our advice will prevent a penalty.
Fees
The fee for the memo is [amount], due [on signing / on delivery]. Follow-up work is billed at [rate] per hour. Our fees do not depend on the amount of tax you save.
Term
This engagement ends when we deliver the memo and any updates listed above, or on [date], whichever comes first. Either of us may end it earlier by written notice, and you will pay for work done to that date.
Confirmation
Please sign and date this letter to confirm the scope you ticked and return it to us. Each of you should sign if the planning covers a joint return.
Best regards, [Partner name], [CPA / EA / attorney] [Firm name] Signature: ____________________ Date: __________ Client: [Name] Signature: ____________________ Date: __________ Client: [Name] Signature: ____________________ Date: __________
Planning is not preparation
A preparation letter looks back: it reports a year that is over. A planning letter looks forward, so its risks differ. The client may act on your memo months before any return shows the result, and the law may change in between.
Write the two as separate letters, even for the same client. The return letter stays the same each year. The planning letter changes with each project, such as a business sale, a move to another state or a large stock option exercise. Keep the return work out of this letter and point to the general engagement letter for it.
For CPAs, the AICPA tax standards treat this as consulting. A tax consulting engagement is work that gives tax advice on a transaction or a plan, rather than preparing a return (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). Advice may be oral or written, and written advice must meet the taxing authority’s standards for it (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)).
A scope menu the client ticks
List the planning areas and let the client tick the ones in scope. Anything unticked is out. The table shows common areas and the inputs each one needs from the client.
| Planning area | What you deliver | Client inputs |
|---|---|---|
| Current-year projection | Projected tax and the gap to cover | Year-to-date pay stubs, prior-year return, gains report |
| Estimated payments | Amounts and dates for each payment | Payments already made, expected income |
| Entity choice | Comparison of entity types for the business | Profit and loss, owner pay, state of operation |
| Retirement contributions | Plan type and room left for the year | Plan statements, employer plan details |
| Equity compensation | Timing of exercises and sales | Grant agreements, vesting schedules |
| Charitable giving | Timing and form of gifts | Planned gifts, appraisals for property |
The written-advice clause
Circular 230 sets the floor for written tax advice. You must base it on reasonable factual and legal assumptions, consider all relevant facts you know or should know, and relate the law to those facts (31 CFR 10.37, Requirements for written advice (Circular 230)). You also may not weigh the chance that a return will not be audited (31 CFR 10.37, Requirements for written advice (Circular 230)).
Turn that into a schedule. An assumptions schedule is the list of facts and estimates the memo rests on, such as income for the year, filing status and state of residence. Attach it to the memo and have the client confirm it. If a fact changes, the advice may no longer hold, and the schedule shows which fact moved.
Reliance has limits too. You may not rely on a client’s projection or appraisal when reliance would be unreasonable, for example when you know it is incomplete (31 CFR 10.37, Requirements for written advice (Circular 230)). Say in the letter that you will ask questions when the facts look inconsistent.
Law changes and who acts on the advice
Under the AICPA standards, a CPA has no duty to tell a client about later developments that affect earlier advice, unless the CPA helps carry out the plan or agrees to report on such changes (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). The standards also say clients should be told that advice reflects the law as of its date (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)).
So the letter should do three things. Date the advice. Say whether updates are in scope and at what price. And say who carries out each strategy: the client, the CPA, or another adviser, for example the client’s attorney for a trust. If the plan sits with a broader financial planning engagement, say which letter governs which piece.
Fees, savings promises and penalties
Fixed fees fit planning well: a price for the memo, an hourly rate for follow-up meetings. By contrast, a value fee is a price tied to the result, and in tax work that is where the trouble starts. Do not price the work as a share of the tax saved. Circular 230 counts a fee based on a percentage of the taxes saved as a contingent fee (31 CFR 10.27, Fees (Circular 230)), and tax planning and advice are matters before the IRS under that rule (31 CFR 10.27, Fees (Circular 230)).
Make no promise of savings. The result depends on facts, on the law and on positions the IRS may challenge. The AICPA standards list, among the factors to weigh, whether you intend the client to rely on the advice to avoid penalties (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). Say in the letter whether you do, without promising that a penalty will be avoided.
One planning item has a clear federal rule to quote. Individuals generally must make estimated payments if they expect to owe $1,000 or more when they file (IRS: Estimated taxes). A projection that shows a balance due should come with a payment schedule, so the client is not caught by an underpayment penalty.
Questions people ask
What is a tax planning engagement letter?
It is the agreement for tax advice on future transactions: the areas covered, the facts the advice relies on, the date of the law applied, who carries out the plan, and the fee. Return preparation goes in its own letter.
Can a tax planner charge a percentage of the taxes saved?
Circular 230 treats a fee based on a percentage of taxes saved as a contingent fee, and it limits contingent fees on IRS matters, which include tax planning and advice (31 CFR 10.27, Fees (Circular 230)). Use a fixed or hourly fee instead.
Must a CPA update tax advice when the law changes?
Not unless the CPA helps carry out the plan or has agreed to report on later developments, under the AICPA tax standards (AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024)). The letter should say plainly whether updates are included.
What documents does a client provide for tax planning?
Usually the prior-year return, year-to-date pay stubs, Schedule K-1 estimates from any business, a realized gains report from the broker, and a list of estimated payments already made.
Sources
- 31 CFR 10.37, Requirements for written advice (Circular 230): Written advice must rest on reasonable factual and legal assumptions, consider all relevant facts, avoid unreasonable reliance, and not take into account the chance of no audit.
- 31 CFR 10.27, Fees (Circular 230): A fee based on a percentage of the taxes saved is a contingent fee, and matters before the IRS include tax planning and advice.
- AICPA Statements on Standards for Tax Services No. 1 to 4 (effective January 1, 2024): SSTS No. 3 covers tax consulting: advice may be oral or written, there is no duty to report later developments unless the member helps implement or agrees to, and clients should be told advice reflects the law as of its date.
- IRS: Estimated taxes: Individuals generally must make estimated tax payments if they expect to owe $1,000 or more when they file.
About the author
Arthur Teboul (Founder, DokuTrak) is building DokuTrak after watching professionals lose hours chasing clients for documents over email. Arthur Teboul.
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