Mitigating risk related to tax reform

Mitigating risk related to tax reform

For many tax professionals, 2018 got a lot busier when President Donald Trump signed P.L. 11597, known as the Tax Cuts and Jobs Act (TCJA), on Dec. 22, 2017. As a result, s were inunted with questions such as “Should I prepay my taxes?” How s choose to answer this question and others related to tax reform will vary, and the choices the makes may give rise to professional liability risk. In fact, one in the AI Professional Liability Insurance Program (the Program) has already experienced a claim whereby the client asserted the failed to advise her to prepay 2017 taxes, causing a permanent loss of a tax deduction.

While tax planning opportunities associated with the TCJA may be a windfall to a firm’s bottom line, vulnerability to professional liability claims exists. When the last significant overhaul of the Internal Revenue Code was enacted in 1986, claims against tax practitioners in the Program increased. Anticipating claims related to the TCJA and identifying how s may mitigate their risk is the of this column.

The two primary risks anticipated are:

To illustrate these risks, consider the following hypothetical scenario:

A client reports partnership earnings from USF. The includes the income on the client’s individual tax return and takes the qualified business income deduction (QBID). She did not ask what type of business USF was.

After the client was audited, the realized that USF was not eligible for the QBID because some or all of its activities were from disqualified specified service business activities. When a significant tax liability was owed, the client asserted that the was responsible for the penalties and interest because she improperly prepared the individual tax returns.

Creating and implementing protocols now is a proactive way to mitigate risk from claims that may arise related to changes in the TCJA.

Employ tax compliance engagement letters

Engagement letters for tax preparation should be limited to compliance only and identify exactly which tax returns will be prepared. Engagement letters for tax planning represent a separate engagement, and a separate engagement letter should be obtained. It is not recommended that “limited tax planning” be included in a compliance engagement letter, as scope of is not defined. AI Tax Section members have access to sample individual and business income tax return engagement letters in the Annual Tax Compliance Kit.

Know the tax reform law

Failure to the nuances of the law and its interpretations is at the root of many professional liability claims. Taking the following measures can help reduce this risk:

Inform clients about tax reform

s should, ideally, discuss TCJA implications with every client, but this may be impractical.

Consider sending your clients a newtter or email with a highlevel overview of changes related to the TCJA. Include a note that clients should contact you to discuss the TCJA’s impact.

Many s will use the TCJA as a new business development opportunity and may host a seminar, giving clients and pects an overview of the legislation’s key components. Leverage the AI sample presentations “Tax Cuts & Jobs Act — Individuals” and “Tax Cuts & Jobs Act — Business Provisions.” Again, impose the responsibility on the attendees to contact you to explore TCJA planning opportunities specific to their situation.

Retain newtter distribution and seminar attennce lists to help in defending a potential future claim of failure to advise about the TCJA.

The TCJA will generate new business opportunities for firms. When new are requested, firms should:

Obtain an engagement letter

When a professional liability claim arises, having an engagement letter that clearly defines the scope of and deliverables is essential. Unfortunately, approximately 43% of tax claims from the CNA Accountants Professional Liability Claim tabase in 2017 involved situations in which practitioners failed to use an engagement letter. Many of these claims were related to tax consulting. Much of what is done related to the TCJA should include a new engagement letter.

A sound tax consulting engagement letter will:

A sample tax consulting engagement letter is available from many professional liability insurers, and AI Tax Section members have access to it with the Annual Tax Compliance K

Identify the client’s options and consequences

The law is not comprehensive, and IRS guince continues to be released. As a result, there may not be clear answers to many TCJA planning opportunities, and clients may have options available to them. If this is the case:

While a client may expect a recommention, the final decision rests with the client.

Much of the advice requested may occur through a quick phone call or other informal discussion.

Providing informal advice may be riskier than giving formal advice because thorough research may not be conducted, clientspecific may not be reviewed, and conversations may not be documented. When a client makes a costly decision based upon incomplete, informal advice, s often become the target of a claim.

To mitigate this risk, after an informal conversation, send an email summarizing the discussion. Ask the client to contact you if recommentions are sought for more formal advice upon which he or she can rely. If you are engaged, document these additional in a new engagement letter.

Deborah K. Rood, , is a risk control consulting director at CNA. For more information about this article, contact

Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AI Professional Liability Insurance Program. Aon Insurance , the National Program Administrator for the AI Professional Liability Program, is available at 8002213023 or visit

This article provides information, rather than advice or opinion. It is accurate to the best of the author’s knowl as of the article te. This article should not be viewed as a substitute for recommentions of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any stanrds of care, serve as legal advice, or acknowl any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and may not be available in all states and may be subject to change without notice.