Writing Client Letters That Explain a Tax Position

9/5/2026

A tax position is only as defensible as the explanation that went with it. When an examination arrives two years later, the letter in the file is what shows what the client was told, what facts the advice depended on, and how confident the practitioner was. When the client reads it the day it arrives, the same letter decides whether they understand the risk they are accepting or simply see a fee.

Most client letters fail one of those two readers. Some are written for the file: precise, hedged, full of citations, and unreadable to a business owner. Others are written for the client: friendly, short and missing the assumptions that made the advice correct. A good letter serves both, and the structure that does it is not complicated.

This guide covers how to structure a letter explaining a tax position, how to word conclusions and risk so they mean something, what Treasury Department Circular 230 expects of written advice, and the habits that keep letters short enough to be read.

Why the Letter Matters More Than It Seems

Three things ride on the letter.

The client's decision. Many positions are choices: claim the deduction or not, disclose it or not, amend or wait. The client cannot make an informed choice from a letter that buries the risk in the fourth paragraph.

Your professional obligations. Circular 230, which governs practice before the IRS by CPAs, attorneys and enrolled agents, sets standards for written advice in section 10.37 and requires in section 10.34(c) that a practitioner who advised on a return position, or prepared or signed the return, inform the client of penalties reasonably likely to apply and of any opportunity to avoid them through disclosure. A letter is the cleanest evidence that you did.

The client's penalty defense. A taxpayer who relied in good faith on professional advice may be able to show reasonable cause for an accuracy-related penalty, but that defense depends on the advice having been based on complete facts and reasonable assumptions. A letter that records those facts and assumptions is part of that defense. A letter that does not leaves the client arguing from memory.

The Structure: Conclusion First

Accountants are trained to build to a conclusion. Clients read the first paragraph and skim the rest. Write for the skimmer.

1. The question

One or two sentences restating what the client asked, in their terms. "You asked whether the cost of the new roof on your rental property can be deducted this year." Restating the question catches misunderstandings before the analysis is wasted on the wrong one.

2. The short answer

The conclusion, the level of confidence and what the client should do, in plain language and in three or four sentences. If the client reads nothing else, they should know what you recommend and how comfortable you are with it.

3. The facts you relied on

A numbered list of the facts as you understand them, with the source of each where it matters ("per the contractor's invoice dated 14 March"). Then a sentence asking the client to tell you promptly if any fact is wrong or incomplete, because the conclusion depends on them.

4. Assumptions

Anything you did not verify but assumed, stated separately from facts. Section 10.37 requires written advice to be based on reasonable factual and legal assumptions, including assumptions about future events, and prohibits unreasonable reliance on representations. Listing assumptions makes them visible and testable.

5. The analysis

The law and how it applies to these facts, written so that an intelligent non-accountant could follow it. Cite the authority, but explain it rather than quoting it. If there is authority pointing the other way, say so and explain why you weighed it as you did. Section 10.37 asks the practitioner to relate the applicable law and authorities to the facts; a list of citations without that bridge does not do it.

6. Risks, penalties and disclosure

What could go wrong, how likely it is in your judgment, what penalties could apply if the position is not sustained, and whether disclosure would change that. This section is where most letters are weakest, and it is covered in detail below.

7. What happens next

The action items, who does each one and by when. Documents the client needs to keep. The decision you need from them, and a date.

8. Scope and limits

What the letter does not cover (state tax, a different year, the transaction's non-tax consequences), and that the advice is based on law as of the date of the letter. Keep this short. A scope paragraph longer than the analysis tells the client you are protecting yourself rather than advising them.

Wording Conclusions and Risk

The single most useful thing a client letter can do is translate the practitioner's confidence into words that carry consistent meaning.

Use the recognized standards

Federal tax law uses a hierarchy of confidence levels that determine whether penalties apply. The ones that matter most in client letters:

Standard	How practitioners commonly describe it	Where it matters
Reasonable basis	A significantly higher bar than not frivolous; a merely arguable or colorable claim does not meet it	With adequate disclosure, can avoid the substantial-understatement and disregard-of-rules portions of the accuracy-related penalty for the taxpayer, and the preparer penalty for unreasonable positions
Substantial authority	Weight of authority supporting the position is substantial relative to the weight against it	Without disclosure, avoids the substantial-understatement portion for non-tax-shelter items, and is the general standard for avoiding the preparer penalty on undisclosed positions
More likely than not	Greater than 50 percent likelihood of being sustained on the merits	Required for tax shelter items and certain reportable transactions

The IRS instructions for Form 8275, the disclosure statement, summarize how disclosure and a reasonable basis interact with the accuracy-related penalty, and why disclosure does not help when the taxpayer failed to keep proper books or substantiate the item. Practitioners also use "should" and "will" for higher confidence levels. Those terms are professional convention rather than statutory standards, so if you use them, define them in the letter.

Write the confidence in plain language too

A client will not know what "substantial authority" means. Pair the term with a sentence they will understand:

"In my judgment there is substantial authority for this position. In plain terms, the law and the cases supporting it are strong enough that, even if the IRS disagreed, a penalty for understating your tax should not apply, although you would still owe any additional tax and interest."
"This position has a reasonable basis but, in my judgment, does not reach substantial authority. To protect you from the substantial-understatement penalty, I recommend we disclose it on the return using Form 8275. Disclosure makes it more likely the IRS will look at the item."

Phrases that cause trouble

"You will not be audited" or "the IRS is unlikely to notice." Section 10.37 prohibits taking audit likelihood into account in evaluating a federal tax matter. Leave it out of the letter entirely.
"This is safe" or "no risk." Almost nothing is. Say what the risk is and how large you judge it.
"Aggressive." Clients read it as either reckless or clever. Use the standard instead.
"I think" followed by nothing. If you are uncertain, say what you are uncertain about and what would resolve it.
Undefined jargon: basis, recapture, ordinary versus capital, material participation. Explain each in a clause the first time it appears.

Penalty and disclosure paragraph

Section 10.34(c) requires informing the client of penalties reasonably likely to apply and of the opportunity to avoid them through disclosure, including what adequate disclosure requires. A compact way to do it:

Name the penalty in plain words (for example, the accuracy-related penalty on an understatement of tax) without loading the letter with rates and thresholds the client does not need.
State whether, in your judgment, it could apply if the position is not sustained.
State whether disclosure on Form 8275 (or Form 8275-R, for a position contrary to a regulation) would change that, and the trade-off: disclosure can avoid certain penalties but draws attention to the item.
Ask for the client's decision in writing.

Plain Language Without Losing Precision

Plain language is not dumbing down. It is removing the effort the reader should not have to make.

Short sentences for conclusions and actions. Long sentences are acceptable in the analysis where qualification is necessary.
Active voice for who does what. "You need to send us the closing statement by 15 November," not "The closing statement should be provided."
Numbers, not adjectives. "This deduction reduces your federal tax by about $8,400" beats "a significant benefit."
Headings in any letter longer than a page, matching the structure above, so the client can find the risk section without reading the analysis.
One idea per paragraph. If a paragraph covers both the law and the risk, split it.
Read it as the client. Before sending, read only the short answer and the next-steps section. If those two alone would let the client make the decision, the letter works.

A short-answer example

Weak:

"Based on our review of the applicable provisions of the Internal Revenue Code and Treasury Regulations, and subject to the assumptions and limitations set out below, it is our view that the expenditure may potentially qualify for current deduction, although there is some uncertainty in this area."

Better:

"You can likely deduct the $42,000 roof repair this year rather than depreciating it. In my judgment there is substantial authority for this treatment, because the work restored the existing roof rather than improving or replacing it, based on the facts in section 3. If the IRS disagreed, you would owe additional tax and interest, but a penalty should not apply. I recommend we take the deduction on your return."

The second version is shorter, specific, states the confidence level, names the key fact the conclusion turns on, and ends with a recommendation.

Letters for Difficult Conversations

Not every letter delivers good news. The same structure works for a letter telling a client that a position they want to take is not supportable, that a prior-year return contains an error, or that they owe more than expected.

Lead with the conclusion anyway. Delaying bad news to the fourth paragraph reads as evasion.
Separate the error from the remedy. One section on what happened, one on what you recommend.
For errors on a prior return, section 10.21 requires a practitioner who learns of a client's noncompliance, error or omission to advise the client promptly and explain the consequences. The letter is the record that you did. Whether to amend is the client's decision, but the letter should make the consequences of each option clear.
Keep emotion out and empathy in. "I know this is not the answer you hoped for" is fine. Apologizing for the law is not.

Our post on handling difficult clients in tax season covers the conversation that usually precedes this kind of letter.

Using AI to Draft Letters

Generative AI tools are good at turning bullet points into a readable first draft and at rewriting dense analysis into plain language. They are not good at knowing whether the analysis is right, and they will confidently cite authority that does not say what they claim. Use them for drafting and tone, verify every citation and figure against the primary source, and never paste client-identifying information into a tool your firm has not approved for that purpose. Our posts on generative AI for tax research and an AI governance policy for an accounting firm cover the verification and confidentiality side in more depth.

A Checklist Before You Send

The first paragraph states the question and the short answer
The confidence level is named and explained in plain words
Facts and assumptions are listed separately, with a request to correct them
The analysis relates the law to the facts and addresses contrary authority
Penalties reasonably likely to apply, and the effect of disclosure, are explained
Nothing refers to the likelihood of audit
Action items have owners and dates
Scope limits are brief and specific
Every figure, citation and form number has been checked against the source
A copy is saved to the client file with the supporting research

Building the Skill

Letter writing is a learnable skill, and the habits above compound: the clearer your letters, the fewer follow-up calls and the fewer disputes about what the client was told. Writing Effective Business Letters covers structure, tone and clarity for professional letters, and Writing Effective E-mails and Memos applies the same discipline to the shorter messages that make up most client communication. For the regulatory side of practice, Tax Practitioner Regulations, Penalties and Security covers the rules behind the penalty and disclosure discussion. The wider range is on the business writing training for accountants page.

Next Step

Take the last position letter you sent and rewrite only the first paragraph so it contains the question, the answer, the confidence level and the recommendation. If that change alone improves it, the rest of the structure will too. To work on letters systematically, start with Writing Effective Business Letters.

Frequently Asked Questions

What should a tax position letter to a client include?

A clear restatement of the question, a short answer with your confidence level and recommendation, the facts you relied on, any assumptions you made, an analysis relating the law to those facts, a section on risks, penalties and disclosure, the next steps with owners and dates, and a brief statement of scope. The order matters: put the conclusion first, because most clients read the opening paragraph closely and skim the rest. The facts and assumptions section protects both the client and the practitioner if the position is later examined.

What does Circular 230 require for written tax advice?

Section 10.37 requires a practitioner giving written advice on a federal tax matter to base it on reasonable factual and legal assumptions, reasonably consider all relevant facts the practitioner knows or should know, use reasonable efforts to identify the relevant facts, avoid unreasonable reliance on representations, relate the applicable law and authorities to the facts, and not take into account the possibility that a return will not be audited or an issue will not be raised. Section 10.34(c) separately requires informing clients of penalties reasonably likely to apply and of opportunities to avoid them through disclosure.

What is the difference between reasonable basis and substantial authority?

Both are confidence standards that affect whether penalties apply. Reasonable basis is the lower one: a position that is more than merely arguable. With adequate disclosure, such as on Form 8275, a position with a reasonable basis can avoid certain portions of the accuracy-related penalty. Substantial authority is higher: the weight of authority supporting the position is substantial compared with the authority against it. A non-tax-shelter position with substantial authority generally avoids the substantial-understatement penalty without disclosure.

Should a client letter mention audit risk?

It should not weigh the chance of being audited. Circular 230 section 10.37 prohibits a practitioner from taking into account, in evaluating a federal tax matter, the possibility that a return will not be audited or that an issue will not be raised on audit. The letter should instead explain the strength of the position on its merits, the penalties that could apply if it is not sustained, and whether disclosure would change that. It is fine to mention that disclosure may increase the likelihood the IRS reviews the item, because that is part of the disclosure decision.

How long should a client letter be?

As short as the decision allows. A routine confirmation can be a few paragraphs. A letter explaining a contested position may run two or three pages, with headings so the client can find the answer, the risks and the next steps without reading the analysis. If the scope and limitations section is longer than the analysis, or the short answer is not in the first paragraph, the letter is probably too long in the wrong places.

Can I use AI to write client letters?

AI tools can help turn notes into a readable draft and rewrite technical analysis in plain language, but the practitioner remains responsible for every statement in the letter. Verify each citation, figure and form reference against the primary source, because AI tools can produce authority that does not exist or does not say what is claimed. Follow your firm's policy on which tools may receive client information, and never paste identifying client data into a tool that has not been approved for confidential use.