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Aggressive Tax Strategies: Managing Client Expectations (part 4)
by Arthur V. Pearson
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Management of Client Expectations
Educating a client is a well known way to manage their expectations. After the engagement agreement, providing a client with tax articles from tax magazines or journals, selected portions from research sources such as CCH, BNA, or RIA, can be useful when explaining, in discussions and in writing, the applicable law, interpretations of that law, and commentators' views.
Beyond simply providing information of the legal universe surrounding the tax position, the return preparer needs to make the client aware of the increased risks they take, as their return position becomes more aggressive. That should include a written description of the process by which the Internal Revenue Service (or state tax authority) may challenge the return position and, if the taxpayer's position is overturned administratively by the IRS, what the client's options may be. This should include the expense which may be incurred in the form of professional fees, additions to taxes, interest, and the variety of penalties that may apply, such as substantial understatement, negligence, frivolous position, etc.
Carolyn Riticher, CPA, of Windham Brannon in Atlanta, advocates having "detailed discussions with the clients, taking notes during the discussions, documenting the discussions from the notes, and sending follow-up letters of summary to the clients afterwards." If the return preparer is meeting with tax attorneys, a similar documentation approach can be used, with a summary letter going to the attorney after the planning meetings, listing open items to be done, who is doing what, and when it will be done. The important thing, according to Riticher, is to "inform the client of all aspects of the tax position and put it in writing, especially if it is a position with some risk in it."
Rob Wheeler, CPA, of Clark Nuber in Bellevue, Washington, agrees with Riticher. "We get into an information sharing process with the client, covering the pros and cons of the position, costs, audits, appeals, going to court, etc. The client must understand all of the factors. We then draft an internal research memorandum with an executive summary for the client, covering all the major points. The client must acknowledge receipt of the memo by signing the return. The main thing is to get the client to take ownership of the return."
Privilege of Confidence and Communication
While on the topic of advice to and communications with clients in this area, a tax professional needs to be aware of the taxpayer advisor privilege of confidence and communication found in Internal Revenue Code §7525. This privilege was promulgated as part of the Internal Revenue Restructuring and Reform Act of 1998. There has been very little case authority on this new law to date. However, in order to preserve as much of the privilege as is possible, any communication which could be deemed tax advice should be sought to be protected under the privilege of confidence in communication of IRC § 7525. This means informing the client of the privilege, marking communications appropriately, and maintaining separate files for privileged communication.
Disclaimers
If you feel you are very close to being unable to prepare or sign a return, will a disclaimer help? The disclaimer letter has its problems as regards the ability of a CPA to prepare and sign a return. If the CPA cannot prepare or sign a return under the SSTS, then the return ought not to be prepared, and no disclaimer is warranted. More importantly, a disclaimer won't solve the underlying problem or permit you to prepare or sign a return you shouldn't. If the return preparer can prepare and execute a return under the "not a frivolous position" standard, but not under the "realistic possibility" standard, then the Statements on Standards require adequate disclosure on the return, and good practice mandates advising the client of risks and consequences in writing.
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This material has been prepared by Murphy, Pearson, Bradley & Feeney for information purposes only
and is not legal advice. Receipt of the information is not intended to create, and receipt does not constitute an attorney-client relationship
between the sender and the receiver. Readers should not act upon this information without seeking professional counsel.
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