A Tax Engagement Letter is an essential document that outlines the terms and conditions between a taxpayer, usually a partnership firm, and their tax professional. The letter contains a detailed description of the services to be provided, the fees charged for those services, and the responsibilities of both parties involved in the engagement. It serves as evidence of an agreement between a tax professional and their client.

For Partnership firms specifically, a Tax Engagement Letter is even more critical because it clarifies each partner’s role and responsibility within the partnership regarding taxation matters. 

It also outlines how each partner will be treated for tax purposes according to their respective shares in profits or losses. This information is crucial as it sets out clear expectations on how partners will share responsibility for reporting income or loss from business operations.

In this article, we will share how to create a professional engagement letter for partnership firms 1065 including best practices.  

What is an engagement letter when it comes to the tax process? 

As we mentioned before, an engagement letter when it comes to the tax preparation process is a contract between the taxpayer and the tax preparer that sets expectations for both parties when it comes to filing taxes. The letter effectively acts as a simplified contract outlining the responsibilities to be carried out and the financial commitments. Engagement letters are typically used by service providers providing tax, audit, financial, consulting, and legal assistance.

An engagement letter must be signed by authorized representatives of both parties in order to be considered a legally binding contract. Since this letter is considered a contract, it must outline the responsibilities of both parties.

The engagement letter is an essential part of the tax preparation process because it ensures clarity between both parties. It helps to avoid any misunderstandings or disputes over expectations, fees or deadlines. Additionally, having a signed engagement letter can provide peace of mind for both parties knowing that all terms have been agreed upon and documented.

It’s important to note that an engagement letter is not just beneficial for tax professionals but also for taxpayers themselves.

When is an Engagement Letter needed?

The following are some examples of tax engagement letters:

• Engagement letter for any new client
• Letters for current clients who may not have received an engagement letter in the past.
• A fresh engagement letter must be sent if the scope or size of an assignment changes.

What is the purpose of a tax engagement letter for partnership firms?

Tax engagement letters are crucial for partnership firms because they help establish clear expectations, reduce misunderstandings, and promote better communication.

The purpose of a tax engagement letter is to clarify the nature and extent of services that will be provided by the tax advisor in relation to preparing partnership firm taxes. 

The letter specifies what documents need to be provided by partners or other parties involved, the deadlines for submitting these materials, fees charged by the advisor, as well as any limitations on liability or warranties given by both parties. 

By having a written engagement letter in place before work commences, both parties can ensure that they are on the same page regarding what is expected of them throughout the process.

What should be included in a 1065 tax engagement letter?

A good introduction

As a tax professional, the importance of building and maintaining client relationships cannot be overstated. One of the most effective ways to start a new engagement off on the right foot is by opening your tax engagement letter with a grateful greeting that thanks your clients for their business. This simple gesture can go a long way in demonstrating your appreciation for their trust and confidence in you.

When addressing your clients in your 1065 tax engagement letter, it’s important to personalise it as much as possible. If you’re providing tax services to a business entity such as a corporation or partnership, it’s important to clearly indicate this in the engagement letter along with the name of the entity.

This shows that you have taken the time to understand their needs and are invested in helping them achieve their financial goals.

Period and purpose of engagement

The period section should specify the length of time that you will be providing services to the partnership firm. This could be for a single tax year or multiple years if the partnership firm has engaged you for ongoing services. Including this information ensures that both parties are aware of how long they will be working together and can plan accordingly.

In addition to specifying the length of time for the engagement, it’s also important to include a purpose section in your engagement letter. This section should clearly outline what specific tax services you will be providing to the firm.

Identify the scope of work

The 1065 form is used by partnerships and LLCs with multiple members to report their income and expenses for tax purposes. The complexity of these filings can vary greatly depending on the size and structure of the partnership or LLC. As such, it’s crucial that you clearly define what services you will be offering as part of your 1065 engagement in order to avoid any confusion or disputes later on.

At its most basic level, a tax service engagement for partnership firms typically involves 

• Preparing and filing (Form 1060) U.S return of partnership income on behalf of clients. 
• Perform a limited amount of bookkeeping and analysis necessary for the preparation of the income tax returns
• Based on the partnership accounts from the accounting records and other information and justifications the client provides, calculating the income tax and capital gains tax based on such accounts.
• Revision of returns
• Advising each partner who was a partner in the company at the time of their specific shares of the income, profits, losses, tax credits, and charges of the company so they can submit their own self-assessment tax returns within the appropriate time frame.

Write out the payment terms

As a tax professional, it is important to clearly communicate the payment terms for your services in your tax engagement letter. Including this information, upfront will help set clear expectations with your clients and avoid any misunderstandings later on.

When drafting the payment terms section of your engagement letter, be sure to include details such as the total fee for your services, when payments are due, and any penalties or late fees for missed payments. It is also a good idea to outline how you accept payments – whether it be by check, credit card, or other methods.

By including these details in your tax engagement letter, you can demonstrate transparency and professionalism with your clients while also protecting yourself financially. Remember that communication is key in any business relationship and laying out clear payment terms from the beginning can help build trust and ensure a successful partnership for both parties involved.

Include what you need from the client

Make sure you have everything you need before you begin working. For that, your engagement letter should define the documentation the client should provide the deadlines for providing it, and what happens if they fail to provide the information within said deadlines. This may include,

• disclosing all sources of income, expenses, allowances, and capital transactions is required for the preparation of all returns
• providing all information required for managing the partnership’s affairs
• maintaining accurate accounting records that at any given moment reasonably reveal the partnership’s financial situation

Standard terms

Consider including all of the following in your engagement letter:

• Retaining and accessing records policy
• Mention that the accuracy of the client’s information determines the work’s results
• Money laundering
• Limitation of liability
• Confidentiality agreement
• Privacy policy
• Arbitration
• Indemnification
• Intellectual property rights
• Jurisdiction communication

The client’s signature

This one is self-explanatory, but make sure both parties read through the engagement letter thoroughly, agree with it or any changes that are made, and sign the document before work can start. 

If you do ask for the client’s signature, make sure you have procedures in place to:

• remind the client to return the executed copy; and 
• verify that any required consents have been obtained before the firm begins working on the matter. 

Engagement letter software with e signature solutions makes it much easier for accounting firms to quickly send out detailed written engagement letter without worrying about the delay of sending physical paperwork back and forth. By utilizing this type of software, a company can cut down on costs associated with printing, shipping, and storage of contracts and other documents related to a deal. Furthermore, it also allows them to quickly get agreements signed by clients in different parts of the world without having to spend time traveling or dealing with slow postal services.

Conclusion

In conclusion, it is important for 1065 tax preparers to consider various points when writing engagement letters. From understanding both parties’ responsibilities to clearly communicate the scope of services, engagement letters help ensure that all stakeholders are on the same page.