Ensuring Compliance with Digital Signature Lawfulness for Business Letters in United States

How to eSign a document: digital signature lawfulness for Business Letter in United States

hello in this video we'll learn how to write a client letter I'm actually going to go through with you so together we're going to actually write a client letter from scratch before we do that let's just talk about some of the basics and some of the elements of client letters well first what is a client letter a written communication of your research of your tax research memo to the client this is commonly referred to as a client letter now there's different types of client letters there's Comfort opinions there's thin 48 opinions there's penalty letters all sorts of client letters the main one we think of client letters is a comfort letter written to a client on a closed stock pattern or an open fact pattern that the client is yet to contemplate of completing now the purpose of the client letter is to educate the client regarding the tax issue or issues and your research findings ultimately the client makes a decision it's their return you as a tax professional whether you're an enrolled agent a CPA an attorney your job is to educate the client and tell them about the risks of certain positions because it's possible that you might come back to the client and say you know what this is an iffy it could be viewed this way or it could be viewed the other way and the idea is to bring this to them and let the client know okay well here are the different risks and hear the different arguments Associated now if it's a very clear-cut opinion as a tax professional whether you're an enrolled agent CPA or an attorney it's also your responsibility under the rules of professionalism to let the client know you must file this way or that way based on the facts provided and we'll see that a little bit later in our memo and I'll bring that up now a form of client letter that expresses specific opinions is known as an opinion letter generally the purpose of an opinion letter is to provide a taxpayer with an opinion supporting a particular transaction or tax return position that's being considered or has already occurred so again you're differentiating closed back pattern open fact pattern the express intention of the opinion letter is to enable the taxpayer to fully rely on the opinions expressed in the letter so that's what it's about you provide this letter to the client basically think about it as a CPA enrolled agent attorney you get the facts from the client and you perform tax research and you create an internal memo within your file for your business for your firm whatever it is then you have to communicate that to the client okay so we have already written the memo we've already done the tax research memo now we're communicating that with the client opinion letters are often issued in short form or in long form now it's almost always the case that you're going to be issuing a short form opinion I'll talk about that in a little bit why that's important but there's times where a long form letter is necessary a long form letter typically provides a well-reasoned analysis of the facts and applicable laws that form the basis for the opinion or opinions expressed the short form just provides an opinion in most cases that's what's used arguably because your research findings are formalized in a Written Letter to the client your legal vulnerability is at its highest when writing a client letter so while writing a client letter can be very easy especially after writing that memo it's also a very difficult task because you need to be very very very careful what language you use I'm going to talk about there was a case called Canal Corp where um it's an example of a bad situation where the client letter was not considered too much and we'll talk about some of the things to avoid but the idea is that while the client letter can be very very easy tasks to do after doing that memo it's also very difficult because you want to make sure that you are you have your risk minimization add-on you do not want to State something in the client letter that the client fully relies Upon A Certain position when there's a chance where that position might not be the ultimate position that let's say if it goes to court actually the court rules in that direction so you want to be very very careful particular particularly particularly with regard to opinion letters it's often the case that third parties may also rely on the opinion it's another situation why you want to be you want to have that that that risk mitigation hat on when you're when you're writing these letters honestly the biggest item in my opinion when you are writing a letter to a client the most important thing to consider is risk mitigation because again client relies on this even other people can rely on this so it's critical in these circumstances you perform a thorough and accurate research and craft a carefully Written Letter in addition you should always consider the below guidelines that we're going to talk about below guidelines in this PDF in terms of how you can lessen your risk and improve the quality of the letter so drafting a letter as I mentioned this is we're talking about the client letter after you've prepared the tax research member if you have yet to prepare a tax research memo go back watch my videos go look at the materials on how to write a tax memo there's different tax memos I go through the basic tax memo factors test we're assuming that you've already watched all of those okay so the client letter should be composed using the general writing tips used when Tac when writing tax memo for internal form purposes so again all those materials and videos that you should have gone through already all those skills are still necessary for this client memo they don't go out the door now there's going to be some differentiation here um big differentiation that the length the style of writing uh those things and I'm going to help you we're going to write it together don't worry we're going to take a memo I wrote in a previous video and previous example where I went through with you and I'm going to actually put that into client memo or sorry client letter client letter format for you so you will have an end product and I'm not just gonna you know um show you an example like some some professors some instructors do I will actually write it with you we will go into a Word document a blank Word document I will start I'll start with the address sir the date the addressee the salutation will go through all of it together do not worry that will be covered in this video stay tuned this video continue watching okay but before we do that I want to make sure we're in the right mindset so again we've already completed the tax research memo and now we are at the stage where we need to write to the client okay so again that's that's kind of your starting point is looking at that that tax research memo however the language and the length should almost always differ like a good speaker a good writer must know the audience before beginning because tax clients and their staff vary greatly in their in their tax expertise it's an important element to consider the technical sophistication when comprising an opinion letter so the idea here is who exactly is your audience most clients um out there they're not tax Savvy to the level of an enrolled agent a CPA an attorney a tax professional they don't know the tax jargon they don't know specifically um when you say um for example the Golson rule the Golson rule if you don't know what that is go ahead stop the video look that up that's that's something that in the tax world we know about and there's all sorts of um you know basis things like that basis might be something that maybe um someone that's not necessarily a tax person but being a business person they might have an idea about even things like long-term capital gains um or then you know because you have to give them some credit but you don't want to assume they know um the all the technical expertise like the Glenshaw glasses especially court cases you can't just assume that they know oh yeah this is a seminal tax case they're going to know Glenn Shaw glass no we don't do that um now there are certain things and I'll talk about these later on in the tax law that's just what they're called like for example code section uh 1231 gains and losses there's no other way to explain that you can explain okay well basically you you have a section 1231 gain or loss from the um the facts or from the information you provide me and therefore it's going to give you preferential tax rate under long-term capital injuries you can explain that to the client but you still have to say a section 1231 gain or loss if the client comes back to you and says what what does that mean you explain this is something under the tax law that's the only way to describe it another thing is section 1245 recapture that's another element in the tax law where um there's no other way to explain you could say ordinary income you know it's ordinary income it's recaptures ordinary income or just say oh yeah you know the transaction will be treated as ordinary income um you don't really I wouldn't really put section 1245 recapture in a client letter but unless again the audiences uh some a tax professional um but 12 section 1231 is an example where you could put that in a client letter because there's no other way to describe there's no other way to describe you can again describe the ultimate consequences that gets preferential treatment but you still got to put section 1231 in there okay you still have put section 1231 and you might be saying well why the client ultimately all they care about is seeing that it gets tailored preferential tax rate and you're right about that but one thing is that occasionally clients just like if you were getting medical advice or advice for your pet um you might go and seek additional advice from another professional so if you do not put section 1231 in there then the other profession would say well they say it's long-term capital gain but um actually it's a section 1231 so you gotta be very very careful okay it's like this fine line you're the balance you don't want to put in technical jargon and all this information you don't want a long a lengthy opinion liar because their time is precious but at the same time you do not want to leave out certain elements like section 1231 gain or loss where it's it can't be really defined any other way in terms of your analysis so you see what I'm saying it's it's it's a fine line okay now I give some examples like what if you have a um you know your top your client is a tax director you're writing to the tax director of a of a large corporation's tax department they're gonna know tax jargon but if you're running to a CFO or CEO that doesn't really have any tax knowledge they just know finance and business you got to be very careful okay you gotta be very careful you can't mention Glenn child glass you can you know you can't mention certain cases and stuff like that I assume they know what that means okay the best solution though lies somewhere in between that's where I provide the example of section 1231. you can't leave that out because I mentioned again A lot of times clients if it's a position they don't like they'll go and seek a second opinion or maybe they have a family friend or they have a um a trusted attorney that doesn't necessarily practice tax but that attorney does go look up the tax law maybe they have like a a general business attorney that they that they deal with and they're coming to you for a special situation so you just have to be very careful except in the most unusual circumstances client letters should not exceed two pages I mentioned earlier short form long form if it's a long form you can go over okay you should try to keep the um the latter to two pages it's even preferable to get it down to one page it's very difficult um when you're dealing with a lot of issues that would get just on one page especially when you have to put this cya this risk mitigation language and put information about the facts in there it can get difficult now there's a lot of facts there's a lot of stuff going on of course go beyond two pages you want to be but you also need to be mindful that the clients their time is even more precious than even when your attack staff writing to a senior partner at your firm so you need to be very very careful about that okay so this is really important format and steps to follow again we're about to get into in a few minutes we're going to actually write a client memo or client letter if I keep calling client memo I apologize it's not a client number it's a client letter we're going to use the memo the tax research memo that we've done in a previous example previous video to draft a client letter before we do that steps I have seven steps and there might be additional steps depending on if you're taking a tax research or writing class but the ones I go through I have the seven steps that every client letter should possess and you want to do these in order from the top to the bottom of apply a letter okay so first step step one is to have an a dresser a date address seat and salutation so basically it's a self-explanatory the top of the letter in the middle or you know formatting up to you but you want to have the address there that's you're the addresser you and your firm then you want to have the date then you want to have the addressee that's going to be the client and the salutation Dear Mr client okay so that's step one easy enough step two is you want to State the objective and scope of the research okay you also want to State the agreement what exactly your firm is doing for the clients this is important because if you're ever potentially you know and again risk mitigation High here I'm not trying to play you know negative not trying to be negative but risk mitigation hat here is what what you have on if something ever happened where you're getting sued by your client you want to restrict through this writing through this letter so that you can bring it before the court is evidence that you were tasked with doing X that's all you were doing you were being paid by the client to perform X tasks if they object to Something in the letter then they need to send you something back or they need to contact you and say no no I wanted you to research this and draft the tax return or I wanted you to research this issue and that issue or I want you to research this and you state the facts but actually the facts are this that's going to be very very important in the client letter that's actually the biggest thing in the client letter in terms of again risk mitigation you want to State what exactly you've done you want to State the facts they provide to you you want to State what exactly you found and you also want to State the disclaimers required by law that you know only the client can rely on this do not use this in any other way those types of things that's basically what the clientelectric is all about you want to basically put restrictions okay now at the same time again all it's basically a legal mitigation you know a risk mitigation document but the same time you want to seem cordial and friendly so when we write this letter later you know I'm going to use language that makes it sound like okay uh you know I put in like some you might call it fluff but it's important it's basically uh client relations PR you want to ensure okay if you just made this very dry um you know harsh document that just you know has all this this legal liability there are times where I've heard of tax preparers tax professionals that have prepared these letters and just the relationship because it's just so dry and so harsh uh in the future you know that was a big element of why they lose a client in the future there might be other reasons but it's one of the elements one of the factors okay so you want to obviously put some we'll call it fluff even though it's important because it is you know public relations client management you know you want to please the client to ensure the client like listen um so again a tone that like listen I have to put this in here for legal purposes um but at the same time you know please feel free to contact me anytime whatever I can do to help you you know that type of language so step two is the objective and the scope of research always always always start a client letter with a statement about what you understand the client has asked you to do you should also acknowledge the agreement of the parties to complete the project so you have to acknowledge and that and that's also another important reason is so you get paid you want to state that in there while it's well another issue we could have a whole another video on preparing contracts between clients and the preparers or the professionals tax professionals if you put this in there if there ever is a dispute and the client receives this letter and they don't ever object to it but what you say about okay this letter confirms the agreement which our firm agrees to do these services for you at this price or just you don't have to put the price in there but our firm agreed to do X for you you're basically are saying like Okay well we've already agreed that there's a contract in place for doing the services so again it's another way to go about that so you should have that in the information okay and by the way under each of these steps unless they're self-evident or self-explanatory I give a little example and these examples are the actual ones I'm going to use when we write let uh right later okay but I will write them from scratch I'm not going to copy and paste that language I will literally write that language from scratch with you um and um you know I prepare this I created this document and you're welcome to use it and if you're taking my class you're welcome to use the same language don't feel like it's plagiarism because I you know I want this to be helpful to you as you can see it's kind of boilerplate where you can fill in the items of course you want to adjust it not everything here is going to be perfect and for those of you out there in practice if you need to write a client letter and you need something to go off of you're welcome to use this as well just I'll throw out the caveat for those in practice that are using this with actual clients just remember that um you know to follow all the IRS regulations in circular 230 and all those important things don't rely solely on my items for you know doing your practice make sure that you research everything but if you want to use this as a starting point that's fine okay so we're going to put an objective and scope of research paragraph where basically we're going to talk about the objective what we're doing um and also the agreement between uh the the clients and the professional what's going on so if you are doing a tax research project you are going to State okay that this letter confirms the agreement in which our firm agreed to determine the tax consequences of this transaction this letter also reports the preliminary results of our investigation into the tax consequences of and again the transaction you know and then again as I mentioned earlier you want to have um the fluff language throughout the presentation throughout the letter that basically says you know hey we're here to help you we're pleased to be of service to you anticipate that our relationship will prove to be beneficially mutual please feel free to call upon me anytime some of you out there are like well that's just a waste of time again it's a way to make the harshness seem not as harsh to kind of you know um I know it sounds bad but like kind of uh cherry-coded or um you know a chocolate cover chocolate coated coated chocolate right make it make it a lot um less harsh okay so that's that's step two step three statement of facts is presented by clients so you want to basically go through and you want to take as much space as you need and you want to hash out the facts and you want to hash out the material facts the client gives you you know pages and pages of facts and they're only asking about certain transaction and only let's say up to let's say there's three pages the facts and only I don't know half a page of the facts actually matter to the transaction put just those half a page now the client comes back and they say well yeah you say this but there's also this other information you're welcome to clarify and or I'm sorry verify the information that you have is still correct the key is that you don't want to leave anything out or you don't want to take a fact or say a fact that's not correct that's incorrect that you know led to your research and assertions that's basically the idea okay this is very very very important okay this is a huge element of the um the client letter is doing this it's huge so what I tend to do is again make this easy for you make it easy for you go to your tax research memo copy and paste the facts that you've taken from your tax research memo put them into the letter because remember when you write the facts for your tax research memo for your client I'm sorry for your internal file those facts should be the only ones that are important to the events anyways so copy and paste them over but of course you need to edit them to make it seem more like it's directly to the clients you don't want to say you know you're writing to the client you know Mr client and you say you know Mr client and year five did this right like you would in the in the tax research memo those facts so the idea is that you want to rewrite it to say you did this you did that as I understand it you did this as I understand you did that so you want to make it on in in those terms and we'll do that in our in our example later on that will be the only point in the quiet letter that we draw from scratch where I copy and paste something because again I highly highly highly recommend you know that you've already done this you've already done this step you've already figured out which facts are important for the research so take those facts from your tax research memo paste them into the client letter you know put it put a statement that says our conclusions are based on you know and understanding that and then State all the facts and you also put a paragraph that basically says you know before I jump into the facts um I'm sorry before I jump into the results I just want to go through the uh the facts and I want to and also explain to the client because sometimes clients are like why are they doing this I already gave them the facts why are they giving me the facts back you wanna this is again going back to that fluff you want to restate briefly all the important facts as we understand them as your firm understands as you understand them and you also want to State please review the statement of facts very carefully our conclusions depend on a complete and accurate understanding of all the facts if any of the following statements either incorrect or complete please call it to my attention immediately no matter how small or insignificant the difference may appear to be and I have an example where I say that language and you want to start by saying our conclusions are based on understanding that and you go through the that's where you copy and paste the facts from your tax research memo and again you edit that those facts to make it seem like it flows better for the client the style of that letter okay the next part is the general summary of the research project results and I talked about this a little bit already but let's now get into it so after you go through the facts then you want to basically get into the conclusions you want to get into the conclusions of your research okay so this portion of the letter focuses on what you found through your research if you found that a client has more than one option communicate each of those options with any risks that might be involved be careful though clients again do not want you to write a really long novel and that's why again generally you want to keep this at two pages again unless it's like a really a lot of information a lot of stuff going on um the client doesn't want they if if we've talked already in the tax research memos of you know making it concise for your Superior whether it's a senior map you know senior or a senior partner um at a firm shareholder you you want to make that concise you want to make this even more concise because clients especially can get upset you know if you just spew out all this information you the client wants to understand you know the information and they want to feel like you know if they're paying a fee they want to be short they want to understand everything so you need to make it really clear and you want to make it shorter in that regard okay again your purpose in the client letter is educate the taxpayer now remember also that the main thing about the client letter is mitigation of risk this this does not required by educating a taxpayer you're not required to put everything down the letter you can put the gists of what you found again stating the facts that's so important because you need to put that in right in case there's ever any type of dispute where it went to court or you're being sued for malpractice issues you want to State all that you can always just put in there at the end like okay well if you want to talk about this more why you know why I came to conclusion let's talk over the phone that's usually what most tax professionals do and by putting it through phone or through email um usually phone is what happens or let's come in and talk in person and talk about these things and I can actually show you the client file it also alleviates some of that that risk it also reduces some of that risk because now you don't have it all in writing okay you don't have it all in writing okay well you're like well I thought putting everything right is important yeah you have your own file internally right to keep track of things that's again going back to the tax research memo but also think about what you're providing to the client you do not want them to take something the wrong way you want to ensure that that the client again it's short it's concise they understand everything and you don't want to overload them of information okay now use language a non-tax person can understand this is very very important uh you don't really want to avoid you want to you want to try to avoid citing code sections and cases I talked about that earlier however there are some items where you probably do need to refer them by the section current example is code section 1231 gains or losses perfect example but let's say you had code section 1245 recapture you could just put ordinary income you can explain you know it comes from depreciation or whatever and even that's kind of questionable again depending on what type of client is if it's a business client they understand appreciation but they have no business understanding whatsoever depreciation that might be very even again it might confuse them so the best thing to do is to provide um assuming I give an example assuming the pre-seeing paragraphs going through the facts represent a complete and accurate statement of all the facts pertinent too and you talk about um what the you know summarizing what the event is whether it's the sale of property whatever it is sale of way we anticipate reporting that event as a long-term capital gain or loss or a section 12-1 so if you say anticipate you do anticipate if it's the transaction is open okay so in this example I use an open transaction you would say it would be reported as an event if it was a closed background where the facts have been closed so that's what we mean when we say we anticipate reporting that would be okay well the client is um considering a open transaction like the facts are not yet finalized they're a proposed transaction okay and then also what I like to do in other words and I will summarize it and that's where I put in the layman's terms so we anticipate reporting the event as a that's conclusion and then in other words I go through just a very very very quick understanding under layman's terms of what it is so for example property transaction is a big area I will say that okay let's let's just let's just read we let's redo the paragraph assuming that and let's assume that the taxpayer is selling land assuming that the preceding paragraphs represent a complete and accurate statement of the facts pertinent to selling of the land in year five we anticipate reporting that event or let's say already happened the event should be reported or this results in a long-term capital gain in other words I'm sorry you want to say this results in a long-term capital gain of and you put the amount whatever the gain is I forgot to do that so you want to obviously put the amount too in other words you will be getting this this gain will be taxed at preferential rates rather than ordinary rates such as rates on wages and business income you want to put something in there that that explains to them what the why long-term capital gains are poor they might have heard about long-term capital gain you won't put something in there that basically in layman's terms that they know about most lay people know about okay there's different tax rates they don't know exactly Which tax rates apply to what but almost all of them that know that there's different tax rates for certain transactions so you want to explain and you want to use examples that we all can understand like business income and wages you know if you're if you have a business owner business income if you have a wage earner wages like okay well maybe they're a medical doctor um they get a W-2 you know they're an employee they know okay well they get paid a lot on their their wages okay now if it's favorable for the client and against the IRS you also want to put something in there and again if it's something that could be disputed by the IRS you want to include there is a possibility that the intro Revenue Service could argue that it's actually considered ordinary income and explain why because it might be treated as inventory to you if you desire be pleased to discuss these matters in very detail now if you're researching something that's in line with what the IRS would argue for example if you said this was ordinary income because it was inventory you wouldn't need to put that in there you would just put if you desire I'd be pleased to discuss these matters in very detail so if you're if you're giving the client a result that would be contrary to what the government would want or or um contrary to the other side where there is an argument on their side then you would want to have this Internal Revenue Service argument or sorry an argument paragraph in there just because again miss misc um risk mitigation it's all about risk mitigation okay so you're going to see an example later on which comes from a previous memo that we did together in a previous video we actually end up having ordinary gain on the sale of land because it's treated like inventory so that would be in line with the IRS the government would prefer an argument rather than long-term capital gain being treated as investment property so you're going to see I'm not going to use that language I'll mention it if this was long-term capital gain I would put you know there's a possibility until Revenue Service could argue and I would explain I'm not going to actually write that in the memo but I'll I'll say that okay and again remember you should have throughout your client letter that if you wish to discuss this further let's set a time to meet or to talk over the phone because that's usually where you will talk to your clients about these things in more depth if they're willing to consider those things in more depth a lot of times they're not they're just going to take your advice okay and then next is step five of closing including references to any required follow-up meetings so after summarizing the uh references or after summarizing the research it's important to close the letter by allowing the client to follow up um again you put all this stuff in there you put fax you put what your um what you understand the project and the engagement to be you're putting um you know the results of your research so you want to put something in there basically saying you know and again you want that fluff language thank you again for selecting our firm for tax assistance it's very important that you go through the letter keep it confidential we strongly recommend that you control access so you don't just let anybody see this if you have any questions feel free to request the follow-up meeting and we can take a look at the files together we can talk over the phone you know all these things we look forward to serving you in the future so that's what you want finally well sorry not finally step six we got two more steps finally with the signature step six is actually the very bottom of the letter and it is the disclaimer statement so for those of you that work at accounting firms law firms tax firms if you're in enrolled agent whatever it is tax preparation a lot of times you'll see these on emails your firm requires that you put something in there a disclaimer statement so we need to put a disclaimer statement in our letter as well now if you're working at a certain firm and you have a disclaimer statement just user disclaimer statement because you need to be in line with your firm okay so use that disclaimer statement I created one um just for here and you're welcome to use this but again don't rely on it fully you can use as a starting point IRS regulations require us to advise you that unless otherwise specifically noted any federal tax advice in this communication including any attachments and closures or other accompanying materials was not intended or ran to be used and it cannot be used by any taxpayer for the purpose of avoiding penalties furthermore this communication was not intended or written to support the promotion or marketing of any of the transactions or matters IT addresses so you just want something at the very bottom of the letter and you want to make sure that's in there and then finally the signature self-explanatory put a signature sincerely and you put your name put the firm name if you're on behalf of the firm um and so on all right so those are the steps and we're going to use those seven steps and I will bring this this PDF backup and we're going through and writing our memo together it's our memo all right when we're using our memo to write the client letter I keep saying that I apologize okay client letter the client letter tax research memo we use that to create the client letter so we will use those seven steps together later on now in addition and this the additional limiting language I have a whole area here of ways you because again the main thing the main hat you want to have on when you're writing a client letter is your risk mitigation hat in addition to the risk mitigation we already have we already have so much in that letter and again you also want to be careful you don't want to be too harsh but you also want to be careful right you want to be careful and you want to um protect yourself if you need to have additional um language in there limiting your risk you I have some examples of areas where you might want to do this now it depends on the situation if you know something is likely to be very questionable by the IRS they're gonna you know flag and audit it it could go before the court then you definitely want to consider additional language also if you have a client that is very very very um you know jumpy they're very um you know they there's I I don't want to you know say the wrong thing about client but you just get that that that vibe from them that like they're very um questionable then you definitely want to think about extra language okay so while the above steps they do stress the limiting language to minimize risk you put those in there there are certain additional limiting language that you might have to put in there um if you don't have to put it in there again you're going to see the language that I'm going to show you different examples of you're going to see it's very very harsh but you need it at certain times if you don't have to be as harsh don't be as harsh you still might want to get some of this stuff in there but you want to be careful about how you put it in there okay so the letter that I've uh or the the steps I've done above that already has enough in there for a a client where you feel comfortable about the position you feel clam you feel comfortable about things but then this is to provide additional Assurance so I have some examples some additional optional statements that you might want to use if you have very very very questionable situations so limit the basis on the way upon which the letter is issued so this is if you know okay a client for example um you know is going to give this to their friends or they're gonna have other CPAs look at this other tax professionals other attorneys um you want to definitely put additional limitation it's already kind of in there okay we've already said about being confidential but you might want to put additional stuff the opinions expressed below are solely on the representations you made in your letter to the undersigned date month date sorry date of month day year any deviations and facts from a statements meaning that letter may result material modifications to a revocation of the opinions expressed here in I'll limit the person so going on what I was saying no other persons no other person has intended beneficiary this letter any representation to the country are prohibited limit the person who may receive the letter or letter or its contents this letter may not be referred to copied quoted or disseminated without the express or in consent of the undersigned limit any opinions expressed to ascertainable standards therefore based upon the stated facts and the relevant Authority cited a realistic basis exists for taking that blank deduction so a charitable deduction right let's say that there's a bunch of different issues in your memo that you had to deal with and now you're writing the client letter and you've got to talk about all those things and maybe the terrible contribution deduction is favorable for the taxpayer but everything else is not tax favorable you want to be clear that hey um you have a base you have a reasonable basis for taking this deduction but you don't have a reasonable basis for taking another deduction you might want to limit it and that no situations okay in the example that we're going to do in a few minutes where I write this from scratch there's really only one uh major issue I mean there's different years at issue there's not like a bunch of stuff going on limit any opinions Express the date the letter is issued the opinions expressed in this letter are limited to those applicable federal income tax laws that apply as the date of this letter future Court decisions or legislative action May defeat the opinions expressed limit your duty actually let me talk about that one so that one you might be saying legislative action May defeat the opinion Express it's not that common for the IRS I'm sorry for Congress to enact a law where it's retroactive but it does has happened so if you do think something will become retroactively it'll go away because Congress you know enacts a law just be careful that and make sure you put that in the letter because again you could be dealing with something um that could open up the floodgates to potential liability through um malpractice suits limit your duty to update the letter The Firm expressly did not denies any duty to update this letter for subsequent factual developments or changes in applicable laws describe clearly describe sorry describe clearly any conditions that the letter is based upon that have not yet occurred so this letter in the opinions expressed are based upon your representation that you will form the corporation pursuant to all valid state laws and issue the shares in ance with all Apple belongs that one I gave you an example so let's say that a client's going to you and they're trying to form a business entity and they're trying to determine should they be an S corporation or a LLC and you ultimately say Okay S corporation for these reasons so they're going to file a new Corporation but again all this stuff is anticipated um you know hasn't happened yet so if you were providing you know okay well if you were an S corporation this would occur if you were an LLC this would occur and basically the idea at the end of the letter if you recommend being Corporation you're basically saying okay well uh this letter in the opinions Express are based upon your presentation nation that you would form a corporation without all state laws blah blah blah okay and then limit the letter to your role as tax professional so as we know um accountants take different hats you know valuation attestation different things so if you're a CPA for example or you're an attorney um you need to limit it to your role as a tax professional right if you're a CPA you're going to say this is not apply to attestation to valuation Services uh you know forensic whatever it is if you're an attorney only applies to tax does not apply to you know it could apply just a civil not criminal you know just apply as a taxes not file property law those types of things okay finally the last thing I want to talk about is what not to do when drafting the letter and I mentioned this earlier Canal Corp um the case where it presents an illustration of what not to do when preparing a tax opinion for a client in Canal Corp the client sought a tax opinion from an accounting firm on the merits of a transaction the accounting the accounting firm provided its opinion the IRS determined that the transaction did not have sufficient Merit and disallowed however the IRS determined that the transaction warranted the imposition of the accuracy related penalty under code section 6662 in response to the taxpayers argument that it reasonably relied upon the professional tax opinion on the transaction from the accounting firm the IRS and the court both agreed that the accounting from opinion was so far from acceptable sorry so far so far from an acceptable tax opinion that the taxpayer could not reasonably rely on it to avoid a penalty so what they're basically saying is that the um the the client letter that was written this opinion letter ran to the client was just so far um was not reasonable and Canal Corp relied on it and basically Canal Corps was saying well I don't even though it was it was reasonable the rule is okay I can still rely on my tax preparer or my tax professional that prepared this and the IRS and the courts are saying no no that's not the case you still need to see if it's considered reasonable or not and the idea here is that we need to basically avoid um having an unreasonable uh client letter altogether and the way that we do that when you look at Canal Corp and rather than spend you know several minutes talking about the canal Corp what they wrote I kind of just summarize what exactly made it unreasonable there really six things there were lots of typographical and grammatical errors it was very disorganized or incomplete sections where they just would talk about things but not you know finish them uh unreasonable assumptions were made questionable conclusions and equivocal language such as it appears or it seems was written which we need to avoid so all these things should be avoided we shouldn't have typographical grammatical errors should be organized not disorganized we should complete all sections all discussion that's why also at times it's really good to keep things maybe shorter and then put them okay we can talk about these in a meeting with me in person look at the client file or talk over the phone unreasonable assumptions were made so you know you want to make reasonable not unreasonable assumptions that was a big one by the by the way questionable conclusions were drawn we want to avoid that and we do do not want to use language that it appears or it seems especially when you have unreasonable assumptions questionable conclusions all these things if something is very clear you can clear language but it's not clear do not use you know language like you will do this or you will do that okay unless you put something in later that says you know it's questionable and you say again to kind of condition it I know I said that was the last thing actually the last thing is the disclosure dilemma okay so I have one last interesting little item to bring up and that is I've gone through and I've talked to you about you know disclosing information in the client letter risk mitigation one thing that I've yet to talk to you about is how how much information exactly you want to provide the client okay one thing I did say is that at times you should be shorter because um you can always say let's do a follow-up in a in a phone conversation or through um let's meet in person I'll show you the client file you can always do that risk mitigation some highly qualified tax advisors seriously question the wisdom including any discussion of disputable points remember I mentioned there that if there is an argument on the other side the IRS can bring up that you should bring it up well that's what I'm talking about some tax professionals say do not put that in there and the reason why is because it could end up being um a document the client letter could be a document that the IRS can get their hands on specifically under code section 7602 the IRS has the right to examine all relevant books papers and Records containing information relating to the business sorry that should be information I apologize information relating to the business of a taxpayer liable for federal taxes now section 7525 extends the attorney-client privilege to federally authorized tax practitioner to to a federally authorized tax practitioner in non-criminal tax proceedings before the IRS and federal courts so basically we have 7602 in the Internal Revenue code but then we also have the 7525 attorney client privilege that prevents certain documents from being shared with the IRS or whatnot so you have like this um pool in both both directions one side says yes IRS can get everything other side says no IRS cannot get certain things however this privilege um the attorney client privilege does not apply to any communication between a CPA and his or her client if the communication will not have been privileged between an attorney and the attorney's client so the question becomes okay well a CPA gets the same privilege regarding Tax Matters but it's only if a attorney would have gotten that to begin with case law supports that information disclosed to an attorney for the purpose of preparing a tax return is not a privileged communication so that means that does not apply to a CPA so the IRS under 7602 can get the client Letter Okay can potentially can get to it the accountant tax practice is the space of a dilemma if a client letter discloses both the strengths and weaknesses of a client's posture um the letter could weaken the client's position okay so specifically what I mean is if you put in there okay well this is ultimately what happens and the IRS could argue this for these reasons well then the IRS could look at that okay they could argue this and they could use that in their argument so a lot of times people are like well um we need to leave out a lot of stuff the problem though is that if you don't bring up those things you potentially face liability so you have that risk mitigation so if you don't bring up those issues then the clients can come back to you and sue you and say well you never brought that to my attention if I knew about that then I would have never put that down so um some advisors disagree with me I think the best approach what would you rather do would you rather you know potentially give the IRS the argument or would you rather face liability again the biggest thing in my opinion here is going to be risk mitigation so I think the best approach is to put the information in there and again you can still restrict certain things by saying okay well here's what the IRS would Iris could not potentially argue on this side make it very very broad um you know not too in depth about every little argument and or at least talk about the material arguments and you can say you know the rest can be discussed in person over the phone and that would then protect that in you know that element um from the IRS getting that information okay so that's really all I have for information about the client letters now we're going to do is we're going to draft a client letter from scratch okay we're going to drop draft a client letter from scratch so what I want to do is I want to pull up a memo that I wrote in a previous video and that is the factors memo I wrote and that memo we're going to use the seven steps we talked about in this client letter and materials and we're going to actually write from scratch from blank a blank Word document we're going to write the actual client letter together so you have that information all right so here's our memo this is our factors memo that we completed and we've got senior partner tax staff date is December 31st 20x1 the subject is Mr client's land sales so I'm just going to read through the facts with you so you have an idea of what what actually happened I'm not going to read the entire memo it's an eight page memo this was a long memo that we did together this is the one where we went through the different factors tests related to whether the sale of property to Calvin client Mr client was investment property or considered inventory and ordinary property so there was the factors tests of whether a developer basically is treated as having investment property when they sell land or treated as inventory those factors tests so here's the facts January year one Florida land developer Calvin Klein purchased a 500 acre parcel of land in Florida for a million dollars December 1st year one Calvin spent two hundred thousand dollars installing sewer water lines and subdividing the land into 300 quarter acre parcel home sites note that this is not meant to add up to 500 Acres due to the Acres needed for streets public spaces etc for the next two years Calvin devoted his efforts to developing other Parcels of land and selling them he averaged 10 lot sales per year per year years one and two these were not part of the 500 acre parcel and averaged 10 lot sales per year for the three years before year one in January year three Calvin sold 100 of the home sites for one million dollars to a builder in one transaction Calvin received 1.5 million dollars in total proceeds that year from land sales no other activity Calvin then held off on selling the remaining 200 home sites as he speculated on a major future increase in value as there was a sudden economic boom in years four and five Calvin engaged in developing apartment complexes for Capital City Construction Corporation also known as 4C December year 5 4C made Calvin an unsolicited offer and purchased the remaining 200 home sites from Calvin for 5 million dollars for construction of a large apartment complex Calvin received seven million dollars in total proceeds that year from land sales no other activity okay and the issue is it the issue of dealing with this fact pattern is what is the character of Calvin's gain if any for the year three or year five sales of the home sites so we had to go through and in the memo I analyzed I went through I calculated the gain in the year three and year five uh sales of the home sites and we determined the amount of gain uh going through code section 1001 um you know all that realized gain your loss recognize gain or loss calculation and then we had to characterize the game and we looked at you know code section 1221 inventory um you know could be inventory because you know basically common is a developer of land um and we have to consider whether this was viewed as investment land because you know at one point Calvin you know speculated that it would go up in value things like that and what you find is that it's basically there's all sorts of cases that make it that view it as a factors test and we found 19 different factors a through S that basically we went through those factors and we found four cases that have a lot of similarity but also some difference and what we did was we created a table okay in the middle we had Calvin's facts we had two of those cases ordinary treatment and by the way I used um the tax software uh blue jay legal and doing this analysis and do it helping me with my Approach that's using artificial intelligence so basically what we did is the ordinary treatment two of those cases of the four that I talk about right here two of those ultimately resulted in ordinary treatment by the taxpayer in a similar situation where you've got developers selling property and then the other two Capital treatment okay so we had to determine whether it was going to be long-term capital gain or it was going to be ordinary gain okay and what we found out is um of the 19 factors a through S um only nine of them had differences uh what I mean difference is you look at all 19 of these holding aside the um the circuit and the see how the rows certain rows like k l for example have no difference everything is no for every single taxpayer right um so that's not a factor where there's any difference well of the 19 and in a row where there is a a red that means there is a difference in at least one of the cases compared to our facts and all the other facts of the other um three cases um out there so I would highlight in red a cell that provides a difference and then that would be the nine different factors where there are differences so we focus just on those nine different factors and making the decision because if the other factors are all the same then what would you know what what fact that doesn't really provide any any guidance for us in terms of this case we just focused on the nine where there were differences which helped us tremendously don't have to go through all 19 right which saves us a lot of time still a long memo because it's still eight pages so we went through those nine factors what differences we basically said Okay um this Factor you know and again I cite the factors again so for example B was the property acquired a single transaction we talk about that b was the property required in a single transaction and I talk about you know um which of the cases resulted in um it being [Applause] a a situation where you know it it was a single transaction and which of them was multiple okay so for example cases one two and four single transaction case three was not and the idea is I have its multiple transactions it looks more like it's a um it's not going to be Capital it's going to be more inventory because you're selling inventory multiple times during the year and we do that with all the different factors go through and compare contrast and we ultimately see okay well but for that factor it leans this way so of those nine factors our situation in our situation seven of the nine seven of the nine factors I actually say it right here way in favor of being ordinary or being treated like inventory we ultimately said okay well this leans more towards in uh entry being treated like inventory and ordinary character not Capital there's still an art there's still some arguments to be made at Canby Capital but much likely that's going to be ordinary and by the way that's also the argument that the IRS would prefer they would not question that because it'd be more taxes that the taxpayer has to pay against the higher tax rate I also talk about section 1237 but you don't even need to mention that because really the factors test is what's key and then we have our conclusion that you you know provide the amount of gain in year three it's 600 000 and it's ordinary in year five it's 4.2 million and it's ordinary and therefore um that's a conclusion that we get to so that information what we're going to do now is we're going to take that and we're going to create a client letter okay we're going to use that information to create a client letter so before I go to the blank document let's just recall the seven steps Step One is the address or the date the address the in salutation step two is put in the objective and scope of the research step three is to is a statement of facts as presented by the clients step four is a general summary of the research project results step five is the closing including any references to any required follow-up meetings step six is put in a disclaimer statement and then finally step seven is the signature so we are going to start go through each of these steps each of these steps we're going to go through them and I'm going to bring them back up after we finish each step okay so we're basically going to go between the steps in the PDF here we're going to go through the facts of the memo and the information in the memo that we wrote and we're going to write on a blank document our client letter all right so here's a blank Word document and step one is to do the addresser the date the addressee and the salutation okay now just to recall our memo is to Mr client and we are uh tax staff we were tax staff right in the memo and Senior partner is the one that's putting this all together so we're going to is Gonna Come From the senior Park okay that's another thing is that usually one of the shareholders sends this a client you know because those are the ones that usually send out the written thing on behalf of the firm to the client okay so we need the addresser the date the um addressee and we need um the salutation of Mr client now I didn't give you any information in the memo about the name of the firm um the address the client so I'm actually going to make all that up we do know we're in Florida okay we're in Florida Mr client is based in Florida we're just going to call our CPA firm let's just call it um we're gonna use CPAs here okay you could be an attorney too um boy we're gonna use CPAs lemon and lime CPAs and they're located in Miami so we're going to say 1200 Citrus Avenue right you like that right Citrus Avenue Miami Florida and let's do the central Miami ZIP code 33131 not an actual firm now we're gonna do the dates so we're gonna use the date of the memo I know it seems a little ridiculous because you know you obviously probably wait a few days after you know the the see your partner's probably waiting after the holidays to view the memo and stuff like that let's just say that you know unrealistically senior partner views it's perfect and Senior partner wants to send it out that day so that was December 31st 20 X1 that's the day of the memo so next is the addressee that's going to be Calvin clients and let's say Calvin Klein is very wealthy and in South Florida a very wealthy area is Palm Beach the island of Palm Beach so we're going to say it's where Calvin client lives I like to use uh tropical themes let's say coconut he looks on coconut street so let's do one one one one coconut streets right I got that tropical theme Palm Beach Florida and the zip code in Palm Beach Florida is 33480 okay and then finally we want our salutation so Dear Mr Klein so just like that that is step one we have our dresser at the top we've got the date we've got the addressee and we've got the salutation Dear Mr client okay so now let's talk about step two step two objective and scope of the research so remember this one what we're doing is we're putting information about the agreement in which our firm what they're doing as well as the um reporting the results of if you're doing a tax research project of a specific transaction you also want to have some fluff language so let's go ahead and let's do that now let's think about we've already seen the memo go back to the memo for this because we can remember we've already looked through if you need go back rewind the video back to the member where I talk about it think about what exactly the memo dealt with the issue the issue was what is the characterization of the sales of the land in years three and five so if you're talking about the agreement the firm is has agreed to determine the tax consequences of the sale of the home sites in years three and five and that's also what the results are going to be so let's go ahead and write that up so again determine the tax consequences of the sales of the home home sites in years three and five okay so I'm gonna go ahead and start typing this letter confirms the agreement in which our firm agreed to determine the tax consequences of the sales of the home sites in years three and five and I apologize if I I'm trying to watch my grammar punctuation um however if you do catch me um you know I apologize obviously I'm writing this so there's a little bit of a um I'm writing this with you using my language as from the PDF as a way to um Keep Me In Balance but if you do notice something's wrong you know please don't jump on me or comment or anything like that I'm just you obviously get it right you get it okay so that's first again you want to state that what the agreement is what the firm is provide providing um the client this letter also reports the preliminary results of our investigation into the tax consequences I apologize I usually type a lot faster but when you are doing a video and you're also talking out loud it makes it a little bit slower so I apologize of determining the tax consequences of the sales of the home sites in years three and five so notice I kept that consistent with above we are pleased to be of service this is just the fluff language to you and anticipate that are relationship will prove to be beneficially Mutual so again you want that fluff language to make it seem um you know all happy please feel free sorry please feel free to call upon me at any time okay I like to do Justified um you can do whatever you want but I like to do that makes it look nicer okay so that is our our step two the objective and scope so again just to review this letter confirms the agreement which our firm agreed to determine the tax consequences of the sales of the home sites in years three and five you also you want to use that language to be consistent with what you're also going to provide results on this letter also reports that preliminary results of our investigation into the tax consequences of determining the tax consequences of the sales of the home sites in years three and five notice I use preliminary results and the reason why is because if this is the first client letter we're writing about this project if something does change or more information comes out then of course it's not the final results we are pleased to be of services sorry we're pleased to be of service see that's why we go back through this right perfect example of us going back and doing uh grammar punctuation check right very very important in practice we are pleased to be of service to you and anticipate that our relationship will prove to be beneficially mutual please feel free to call upon me at any time so we got some great language in there to help balance out the harshness also what I'm showing you here is this is actually what I do when I write letters I usually do it you know I don't do it loud unless it's like a really you know difficult paper or I'm writing like a tax research memo it's difficult I go through and I read it in my head just to make sure it makes sense that sounds good so that is step two boom okay now we're going to do is we're going to go back to the steps and see what step three is all right step three is to provide a statement of the facts as presented by the client so this is very very very important you want to make sure you want to put a paragraph that basically explains why you're going to be doing this we're talking about the facts of a certain event and why you're doing it and then you actually want to put the facts in there now we're actually going to copy and paste the facts from the memo and then we're going to edit them to make them more stylistic for our memos that looks more direct to the client rather than just saying you know Calvin Klein in January year one purchased a 500 acre parcel of land in Florida you know we're not going to say we're going to say you purchased a 500 acre parcel land in Florida okay so let's go ahead now let's go back to our our blank memo that we're writing and we're going to put in that paragraph that talks about why exactly we're going to need to go through the facts with you first we need to talk about the facts of a certain event and then we can go into the actual facts first paragraph before stating the preliminary and again preliminary because it's the first t