Tax Risk Management Archives - CAMICO

Post-Tax Season Tips for Managing Risk

Amber — Tue, 24 Jun 2025 23:34:53 +0000

With more than 60% of CAMICO’s claims originating from tax-related matters, addressing and managing the risk stress points associated with problematic tax clients can significantly improve a firm’s risk profile. There is no better time than now, before the final phase of tax season, to take proactive steps to better position your firm to ensure you are maintaining the right overall firm/client fit.

The first step is to prioritize performing the “right services” for the “right clients.” Evaluate your client list and consider disengaging clients that do not meet the right firm/client fit threshold — ideally after they have paid their bills.

Some questions to consider as you look to identify and mitigate client scenarios that may pose higher risk to the firm:

1. Is the client still a “good fit”?
Although not meant to be all-inclusive, common red flags include:

Difficult or uncooperative behavior (e.g., withholding critical information, argumentative and/or disrespectful to firm members)
Deteriorating client relationship (e.g., not taking your advice, being non-responsive, and/or acting in a way that suggests compromised integrity)
Constantly questioning your value (e.g., allegations that your fees are too high, or others could do it cheaper, and/or insinuating that the work should be “easy” thus your fee should be less)
Changes in client business and/or client management
Potential conflicts of interest

Trying to uncover the source of the problem could be beneficial, but whatever you do, don’t ignore the above warning signs.

2. Is the engagement a “good fit” for the firm’s expertise?
It is important to recognize, embrace and maintain your competencies. If clients seek your help with transactions and/or activities outside your comfort zone or skillset, you will be better served suggesting they seek the advice and counsel of professionals with expertise in those areas.

In CAMICO’s experience, firms who don’t “stay in their lane” and choose to dabble outside their comfort zone have a much higher risk of having a claim. Learning the art of saying “NO” to clients is an important, but often overlooked, risk mitigation tool.

3. Are you taking the right steps to manage (and document) client expectations?
Good written documentation habits are critical to successfully managing client expectations, but extra diligence should be given to documentation when dealing with potentially problematic clients. Jurors (members of the public) generally consider CPAs to be experts in documentation, and falling short of that expectation may be viewed as negligent and perceived as falling below the standard of care.

Below are important situations requiring documentation to help mitigate the risk of client expectation gaps:

Change in engagement scope (may require a new engagement letter)
Negative information (e.g., tax return is already late, client’s failure to provide timely information, client is facing an audit)
Client agreement to take significant action
Communications regarding past-due invoices
Conversations regarding significant transactions, extensions, or estimated tax payments
High-risk scenarios that may require informed consent, waiver of potential conflict, and/or client representation of key facts and circumstances

Contact CAMICO or Your Risk Advisor

If the above assessment identifies client scenarios that you deem may pose risk to the firm and/or clients that are no longer a good fit for the firm, contact CAMICO or your risk advisor to help you assess the next steps. For example, if disengagement is deemed appropriate, skillfully handled transitions can be mutually beneficial to firms and clients.

In addition, CAMICO encourages early reporting by reducing the deductible by 50%, up to $50,000, for any potential claim that is reported before a claim is made. Further, if CAMICO determines that it is appropriate to retain counsel to assist with a potential claim, the related expenses preceding a claim will be absorbed by CAMICO and will not impact policy limits or be charged to the deductible.

CAMICO policyholders with questions regarding this article or other risk management topics should contact the Loss Prevention department at lp@camico.com, or call our advice hotline at 1.800.652.1772 and ask to speak with a Loss Prevention Specialist.

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CAMICO Tip: Tax Engagements – Managing Client Expectations

Amber — Wed, 19 Feb 2025 19:39:25 +0000

Are you taking the right steps to manage (and document) client expectations? Effective communication is a key factor in any CPA-client relationship, and when you work to stay in control of managing client expectations, you help to safeguard your firm. To that end, good documentation is critical to successfully managing client expectations. Jurors (members of the public) generally consider CPAs to be experts in documentation, and falling short of that expectation may be viewed as negligent and perceived as falling below the standard of care.

Below are helpful documentation tips to get you through the remainder of tax season:

Engagement letters. While engagement letters won’t immunize you from lawsuits, they can be your first line of defense if a client makes a claim against you. Although you likely already have executed engagement letters in place with your tax clients, for those engagements that have had some engagement creep, memorialize the additional services by updating your engagement letter or obtaining a signed addendum clarifying the revised scope and limits.
Always document significant meetings and communications. Follow up with written communications in circumstances including, but not limited to:
- Change in engagement scope (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., aggressive tax positions taken by your predecessor)
- Client agreement to take significant action
- Conversations regarding transactions, extensions, or estimated tax payments
“Advise” clients of opportunities and “warn” clients about risks. Consider the need for additional documentation (e.g., client notification letters, tax representation letters, etc.) to mitigate high-risk issues such as the following:
- Recent legal and regulatory developments regarding the Beneficial Ownership Information (BOI) reporting requirements under the Corporate Transparency Act (CTA) have implications for reporting companies’ compliance obligations and FinCEN’s enforcement of the CTA reporting rules as currently promulgated. As the CTA-BOI saga continues, CAMICO strongly recommends that CPA firms continue to keep clients informed and advised as these significant developments occur.
- For clients with significant digital asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement addressing cryptoasset implications. The additional defensive documentation provides evidence of the client’s understanding and acceptance of their responsibilities regarding digital asset transactions and the limitations of the services your firm provided.
Written documentation should be factual, professional, and without personal commentary or unsubstantiated opinions. Unprofessional and/or inappropriate comments can damage the integrity of documentation. Ask yourself whether your documentation would be helpful or harmful if presented at trial.

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Engagement Letter Do’s and Don’ts

ssAdmin — Fri, 13 Dec 2024 19:07:55 +0000

Signed engagement letters help CPA firms improve communication with clients and protect the firm from litigation as “the first line of defense.” Use the following tips to help you write more effective engagement letters.

Engagement letters should…
• State the purpose of the engagement.
• Define the scope and limits of the engagement.
• Specify known negative conditions or adverse situations.
• Include client instructions, responsibilities, deliverables and dates.
• Note reliance on facts provided by the client.
• Outline terms of fee collections and the consequences of late payment.
• Include a stop-work clause.
• Indicate the firm’s record retention policy.
• Include third-party service provider language, if applicable.
• Include alternative dispute resolution language (i.e., mediation for all disputes and an arbitration clause for fee disputes only).
• Confirm client’s acknowledgment to the terms of the agreement and request client’s signature.

Additional considerations
• Include protective language on traditional tax and financial statement engagement letters that specifically disclaim the firm’s involvement with assisting client with compliance under the Corporate Transparency Act. CAMICO recommends that any such CTA related services be covered under a separate standalone CTA engagement letter.
• Specify the client’s responsibility for the adequacy of a system of internal control.
• If applicable, explain limitations regarding financial statement distribution.
• Evaluate the appropriateness and efficacy of including limitation of liability clauses.

Engagement letters should not include…
• Marketing information. The engagement letter should be viewed and composed as a contract.
• All-encompassing language. Limit the scope of your firm’s work by avoiding superlatives and absolutes such as all, every, any, complete, confirm, totally, validate and verify.
• Legal jargon or ambiguity. Don’t use abbreviations or words only a CPA would understand. Any ambiguity will most likely be decided in the client’s favor in a court of law.

Additional tips
• Avoid evergreen letters — update letters annually to reflect changes in the scope of the engagement.
• Update engagement letters whenever engagements change.
• Avoid usurious interest charges. Instead, assess a “late fee” for unpaid balances.
• For tax engagements, include the full or exact name of the client, entity type, specific state name(s) and tax year(s), and purpose of the engagement.

Save yourself time and energy by using the letters specially crafted for CPA firms by CAMICO experts.
As seen above, a clear, comprehensive engagement letter is one of your best safeguards against future disputes. CAMICO offers policyholders with Professional Liability Insurance access to engagement letter review services. CAMICO’s internal Loss Prevention Specialists are happy to review and comment on your drafted engagement letters – at no cost. Furthermore, CAMICO has 150+ sample engagement and disengagement letter templates available on its Members-Only Site. CAMICO experts designed these sample letters to be clear and understandable for clients, provide appropriate documentation for you, and effectively outline the scope of your work.

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Tax Season Documentation Tips

ssAdmin — Fri, 23 Feb 2024 20:08:52 +0000

CPAs are considered to be experts in documentation by jurors (who are members of the public). Falling short of that expectation when faced with a liability lawsuit 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:

Written documentation should be factual, professional, and without personal commentary or unsubstantiated opinions. Unprofessional and/or inappropriate comments can damage the integrity of documentation. Ask yourself whether your documentation would be helpful or harmful if presented at trial.
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.
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
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.”

Remember, be proactive, not reactive, as you work with your clients. 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.

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Risk Management Aspects of the Employee Retention Credit Withdrawal Process and Voluntary Disclosure Program

Amber — Tue, 20 Feb 2024 21:29:39 +0000

By Duncan B. Will, CPA/ABV/CFF, CFE and Anthony J. Cooper, J.D., MBT

In late December 2023, the IRS announced a Voluntary Disclosure Program for taxpayers who claimed and received the Employee Retention Credit (“ERC”) but are ineligible. The IRS Voluntary Disclosure Program (“VDP”) follows the IRS announcement in October 2023 that allows certain taxpayers who filed an ERC claim (but have not yet received a refund) to withdraw their submission without penalty. The IRS initiated these two opportunities as part of their ongoing efforts to combat dubious ERC claims, as the IRS is aware ERC scammers have misled well-intentioned taxpayers into believing that they qualify for the ERC.

CPA firms who have clients that may (or should) be questioning whether they were, in fact, eligible for the ERC should advise these clients to consider the IRS withdrawal option or Voluntary Disclosure Program if they meet the eligibility criteria. Although in-depth analyses are beyond the scope of this article, below are highlights for your reference.

ERC Withdrawal Option
To help protect taxpayers from penalties that could be imposed on ineligible claims, the IRS withdrawal option permits taxpayers that filed an ERC claim for which they were ineligible and have not yet received a refund (or who have received an ERC refund check but have not yet cashed or deposited it) withdraw their claims and avoid the imposition of interest and penalties.

Taxpayers opting to withdraw their ERC claim through this method are requesting the IRS to disregard the entire adjusted employment tax return. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not assess penalties or interest. Taxpayers who utilize the withdrawal process will receive a letter from the IRS about whether their request was accepted or rejected. This method does not apply to taxpayers who have made additional adjustments on a claim or only wish to reduce the amount of their claim. Such taxpayers will need to file an adjusted employment tax return on Form 941-X.

Generally, withdrawn claims are treated as if they were never filed. However, taxpayers found to have willfully filed a fraudulent claim, and those who assisted or conspired to do so, remain subject to criminal investigation and prosecution.

ERC Voluntary Disclosure Program
The VDP enables eligible taxpayers to reimburse a substantial portion of ERC funds received under potentially noncompliant claims. Acknowledging that many taxpayers sought ERC claims with the assistance of third-party advisers (many of whom were paid contingent fees), the IRS identified instances where eligibility requirements were misinterpreted.

To participate in the Voluntary Disclosure Program, taxpayers must complete and submit an application on IRS Form 15434 by March 22, 2024.

Under this program:

Taxpayers are obligated to repay only 80% of the claimed ERC, with the remaining 20% exempt from income taxes.
No interest or penalties will be imposed on the underpayment of employment taxes resulting from a non-qualifying ERC claim if the 80% repayment is made before executing the closing agreement.
Taxpayers who participate in the VDP may need to amend prior year income tax returns to obtain the full benefit of the wage expenses.

Eligibility Criteria for the ERC Voluntary Disclosure Program:
The Program is applicable to eligible taxpayers who filed an ERC claim, received a credit or refund, and meet the following conditions:

Not under criminal investigation or notified by the IRS of intent to commence a criminal investigation.
Not under an employment tax examination for the relevant period.
Not previously issued a notice and demand for ERC credit or refund repayment.
Not previously identified by the IRS, either by a third party or through enforcement actions, as being noncompliant.

Risk Management Guidance

CAMICO strongly recommends that firms inform and advise clients in writing of the availability of:
- The option to withdraw their ERC claim submissions, and
- The Voluntary Disclosure Program, that will sunset on March 22, 2024.

CAMICO has a client notification template for this purpose that is available on the Members-Only Site’s Tax Resource Center.

Retain a list of all clients to whom you send the notification.
Determine your firm’s willingness, knowledge, expertise, and risk tolerance to take on assisting eligible clients with either or both programs, and if you decide to do so, assess what services you are willing to offer and how best to deliver those services. If you determine that your firm will not render such services, make it clear in your client notification that you are advising firms to consult with a qualified professional.
If requested to assist a client with either or both programs:
- Assess whether the specific client needs may require a level of knowledge and expertise that would be better suited for another qualified professional. For example, consider whether the client would benefit from having these services receive attorney-client privilege by working directly with or having these services under the umbrella of a qualified tax attorney. Also, the client may be better served by having the original preparer/processor assist with the withdrawal process or application for the VDP.
If agreeing to assist a client with a withdrawal request or application to the ERC Voluntary Disclosure Program:
- Obtain a signed standalone engagement letter that clarifies the limited services the firm is rendering and contains appropriate disclaimer language.
- In addition, obtain written client representations acknowledging that management is responsible for the accuracy and completeness of the information they provide to the firm for purposes of assisting with the withdrawal request or assisting with completing the application for the VDP, and acknowledging their understanding that the firm is not providing any services to assist with determining eligibility for the ERC as part of this limited service.
- CAMICO templates for both the engagement letter and management representation letter are available on the Members-Only Site’s Tax Resource Center.

Additional Information

IRS Resources
IR-2023-193 Withdrawal process for ERC claims (October 2023)
IR-2023-247 Voluntary Disclosure Program (December 2023)

AICPA Resources
AICPA Employee Retention Credit Resource Center

Employee Retention Credit Client Documentation Memo Template [available to AICPA Tax Section members] is a customizable MS Word template designed to document discussions with clients regarding their eligibility for the credit, the conclusion as to their eligibility, and the basis for those conclusions; as well as a checklist of cautionary communications describing potential consequences including the option to file Form 14242, Report Suspected Abusive Tax Promotions or Preparers.

CAMICO Resources
CAMICO has developed risk management resources on this topic, and you can access them by logging on to CAMICO’s Members-Only Site under the Tax Resource Center.

CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention department at lp@camico.com or call our advice hotline at 800.652.1772 and ask to speak with a Loss Prevention Specialist.

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January Tip of the Month – Helpful Documentation during Tax Season

Amber — Thu, 25 Jan 2024 22:49:35 +0000

CAMICO has been developing risk management solutions for CPAs for more than 37 years, and we recognize and understand the challenges facing CPA firms navigating each tax season’s nuances.

Below are helpful documentation tips to get you through tax season:

Engagement letters. While engagement letters won’t immunize you from lawsuits, they can be your first line of defense if a client makes a claim against you. Although you likely already have executed engagement letters in place with your tax clients, for those engagements that have had some engagement creep, memorialize the additional services by updating your engagement letter or obtaining a signed addendum clarifying the revised scope and limits.

Numerous CAMICO engagement letter templates are available on the Members-Only Site’s Engagement Letter Resource Center.

Always document significant meetings, communications and follow-up. Follow up with written communications in circumstances including, but not limited to:
- Change in engagement scope (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., aggressive tax positions taken by your predecessor)
- Client agreement to take significant action
- Conversations regarding transactions, extensions, or estimated tax payments

“Advise” clients of opportunities and “warn” clients about risks. Consider obtaining a tax representation letter or stand-alone certification letter to mitigate high-risk scenarios such as the following:
- If your firm is preparing amended income tax returns to reflect the ERC adjustments as required by the taxing authorities, and the firm is NOT responsible for assessing or opining on the client’s eligibility for the ERC, CAMICO strongly recommends that in addition to having a signed engagement letter for such services, firms also insist the client sign a tax representation letter (this letter can be found on the Members-Only Site in the Tax Resource Center). This added defensive documentation will help protect the firm if clients later allege that the firm should have opined regarding eligibility for the credit, and/or if clients later allege the firm did not appropriately advise them of the potential risk given the extended statute of limitations afforded by the IRS for assessments without a corresponding extension for taxpayers to pursue refunds on the income tax returns.
- For those clients with known extensive digital asset transactions, it may be prudent to have them sign a tax representation letter or a stand-alone certification letter at the conclusion of the engagement addressing cryptoasset implications (these letters can be found on the Members-Only Site in the Tax Resource Center). The additional defensive documentation provides evidence of the client’s understanding and acceptance of their responsibilities regarding digital asset transactions and the limitations of the services your firm provided.

In addition to the above examples, there is a new area of potential risk associated with the Corporate Transparency Act (“CTA”). The CTA introduces a new and expansive reporting regime for entities deemed to be Reporting Companies to report “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”). CAMICO strongly recommends that CPA firms inform and advise their clients of the beneficial ownership reporting requirements under CTA. (Refer to CAMICO’s article, “Corporate Transparency Act / Beneficial Ownership Information Reporting — Risk Management Considerations for CPA Firms”).

Written documentation should be factual, professional, and without personal commentary or unsubstantiated opinions. Unprofessional and/or inappropriate comments can damage the integrity of documentation. Ask yourself whether your documentation would be helpful or harmful if presented at trial.

The post January Tip of the Month – Helpful Documentation during Tax Season appeared first on CAMICO.