How to Identify and Manage Risky Tax Clients Before It’s Too Late
Most professional liability claims in accounting stem from tax-related matters, making it critical for firms to proactively address potential client risks. The final phase of the tax season is the ideal time to evaluate your client base and ensure you’re only working with those who align with your firm’s values, expectations, and expertise.
Step 1: The Right Clients & the Right Services
First and foremost, you need to ensure that your firm provides the right services to the right clients. The steps can be overwhelming, starting with evaluating your current roster and making some tough decisions about clients who may no longer be a good fit. It is preferable to do this after any outstanding invoices are settled.
Questions to Help Assess Client Risk:
- Is the client still a good fit?
If some of your clients are following certain behaviors or have a pattern, these are often indicators of future problems. Here are a few red flags you should be aware of:
- Uncooperative or difficult behavior (e.g., withholding information, argumentative or disrespectful tone)
- A deteriorating working relationship (e.g., ignoring professional advice, lack of responsiveness)
- Regularly questioning your value (e.g., complaining about fees, comparisons to other alternatives)
- Major changes in the client’s business or management
- Emerging conflicts of interest
While understanding the roots of these issues can surely help, don’t ignore them at any cost.
- Is the engagement within your core competency?
The strength of your firm lies in its expertise. In case your clients ask for help that lies outside your comfort or qualification, such as complex transactions or unfamiliar regulations, it’s rather safer and more professional to refer them to someone else with the appropriate skillset.
Firms that stretch way beyond their core competencies often end up facing a significantly higher risk of claims. One of the most vital skills for managing risk is to learn how to say no to something which isn’t a good fit.
- Are you setting and documenting clear expectations?
When working with challenging clients, strong documentation is the most effective tool for managing risk. Courts and clients expect accountants and tax professionals to be detailed and diligent in their record-keeping, and falling short can be interpreted as negligence.
Situations that call for extra attention to documentation include:
- Any change in the scope of services
- Negative or problematic developments
- Client agrees to take significant action
- Communication regarding overdue payments
- Important conversations about transactions, extensions, or estimated taxes
- High-risk scenarios where informed consent, waiver of conflicts, or written representation is appropriate
Knowing When & How to Disengage
If, according to your assessment, any clients or situations pose increased risk, consider whether disengagement is the appropriate course of action. Given that the situation is handled properly, transitioning away from a misaligned client can benefit both parties and protect your firm in the long run.
When planning a disagreement, make sure it is:
- Timely (not in the middle of a key filing deadline)
- Communicated in writing
- Professional and courteous, and with a referral if appropriate
Be Proactive
Effective risk management involves being proactive, not reactive. Identifying stress points, setting boundaries, and ensuring client alignment early on can prevent costly disputes down the road.
If you’re unsure how to handle a particular client situation or are facing a potential issue, consider seeking guidance from a risk advisor or legal counsel to help assess next steps.
Shayne Bevilacqua, MBA, TRA, is a licensed insurance agent and the Principal of Professional Liability Insurance Group (PLIG) and Bevilacqua Insurance Group (BIG). As a Trusted Risk Advisor, he works closely with accounting firms to help them manage liability risks by aligning coverage with firm capabilities and strengthening risk management practices.
