When a Circular 230 practitioner dies and leaves behind a tax practice, it may raise difficult questions for those who inherit the practice. For example, what happens to their clients? Who is responsible for administering the deceased practitioner’s estate? Taking action now to lay out a succession plan for your practice can help reduce the legal headaches and financial questions your family and business partners may face if you should die unexpectedly.

The practice’s legal obligations and restrictions may vary depending on the practitioner’s status as an attorney, certified public accountant (CPA) or enrolled agent, and where the practitioner conducted their practice. Treasury Circular 230 sets forth rules of conduct for attorneys, CPAs, enrolled agents and other persons representing taxpayers before the IRS. While Circular 230 does not directly address the implications of a practitioner’s death, Section 10.33 sets forth aspirational best practices that tax practitioners can consider when planning.

Succession planning should start at engagement

The best thing you can do as a practitioner now in preparation is communicate, communicate, communicate. Communicating clearly and regularly with clients should begin at engagement and helps manage client expectations throughout their professional relationship. Tax pros should discuss all significant aspects of service — scope, terms, purposes or objectives and actions to be taken. These aspects should also be documented in a comprehensive engagement letter with the client. Should a practitioner unexpectedly become incapacitated or die, the comprehensive engagement letter and timely updates will assist in any needed transition of the client’s matter to another tax professional.

Another best practice is to establish a clear policy for retention, disposition (including destruction), and return of client files and other records. Communicate this policy clearly in the engagement letter. Retaining client files beyond the need for them leaves tax practitioners at risk for potential exposure of confidential client information and, upon the practitioner’s retirement, incapacity, or death, can cause an unnecessary burden in dealing with the files and related records.

Finally, implement a data security and privacy plan that complies with rules, requirements and guidelines applicable to your practice. You could also consider adopting a business continuity plan that addresses the effect of extraordinary broadscale events (such as a natural disaster, cyberattack or a pandemic) and lays out steps to be taken in the event of the practitioner’s incapacity, death or general unavailability.

Make a succession plan

It’s never too early to start planning your own practice’s legacy. Practitioners should consider developing a formal succession plan that addresses how the sale or termination of the practitioner’s business (due to retirement, incapacity or death) will be handled. Here are a few steps to get you started on creating a plan. Enter into an agreement with another tax practitioner, an “assisting practitioner,” who will close the practice and familiarize the assisting practitioner with the contours of your practice.

1. Keep an up-to-date inventory of all open client matters, including client names, addresses and contact information

2. This inventory should be sufficiently detailed to allow assisting practitioners, or whoever assumes responsibility, to quickly comprehend your client’s needs and expectations, including upcoming deadlines.

3. All files should be secured, e.g., with passwords and encryption, and steps should be taken to ensure the assisting practitioner can securely access the records.

4. Ensure the assisting practitioner has access to information and funds to stay current with bills and finances

5. Discuss with clients whether to authorize additional practitioners to represent the client or receive information on the client’s behalf via a Form 2848 or Form 8821, respectively, to avoid an interruption in representation before the IRS

6. Devise a communications plan to inform clients in the event of your incapacity or death

7. Speak with your own family members regarding the existence of the succession plan and their involvement with the plan

What happens to a tax practice when a practitioner dies

When the tax practitioner either becomes incapacitated or dies, if there is a succession (or business continuity) plan, the practitioner’s firm or assisting practitioner should implement the plan and communicate with the practitioner’s clients and the IRS.

If there is no succession plan, in the case of a sole practitioner, the executor or administrator of the practitioner’s estate will have to take these actions and should consider retaining a tax professional to assist them.

Communication with clients

Procedures should be put in place for the handling of ongoing client matters according to what each client wants and for the disposition of client files, i.e., their return to the client, transfer to the assisting or another practitioner, or their destruction.

If a succession plan is in place and the client has previously been informed of what would happen to their matter upon the practitioner’s incapacity or death, while not required under Circular 230 (or bar and accountancy rules), this advance notice to clients about who will receive their records (and assume responsibility for their cases) will set expectations and is considered a best practice by many practitioners.

Client choices

1. If the client chooses to remain with the practitioner’s firm (or with another practitioner agreed to in advance), the assisting practitioner must ensure that all necessary paperwork is filed with the IRS (especially for clients under examination).

2. If the client chooses to go elsewhere, arrangements should be made for the prompt and orderly transfer of all the client’s files. Section 10.28 of Circular 230 addresses a practitioner’s obligation to return client records upon the client’s request; any successor practitioner would have a similar obligation.

3. If there is no succession plan and no advance notice to the client, the assisting practitioner should promptly confirm arrangements with each client. No client files should be transferred to another practitioner without the client’s permission.

In implementing a succession plan, the assisting practitioner should also:

1. Ensure that no files are removed without client permission

2. Control access to the premises

3. Backup electronic files (whether stored locally or in the cloud)

4. Interview employees, independent contractors, and vendors to ascertain all known clients and client property beyond available records

5. Consider publication in local media of the office closure and the need for clients to retain new representation and take possession of their files

6. Keep copies of files for the deceased practitioner’s estate, as necessary, in connection with potential claims against the practitioner and to help determine the rights to fees and reimbursable expenses
   a. Track and confirm that clients have received notice
   b. Safeguard client confidentiality

Communication with the IRS

1. Contact the Return Preparer Office (RPO): If the deceased practitioner had a preparer tax identification number (PTIN), there is no need for the assisting practitioner to inform the RPO of the death. The RPO checks the National Accounts Profile (NAP) monthly and changes PTIN statuses to “deceased” as appropriate.
   In contrast, the RPO should be notified if the practitioner is incapacitated. Notification by a fiduciary (e.g., a guardian or trustee with a Form 56, Notice of Fiduciary Relationship, on file with the IRS) will cause the RPO, upon the fiduciary’s request, to change the practitioner’s PTIN status to “inactive.” If the notification is submitted by someone other than a fiduciary (such as an assisting practitioner), the RPO will log the information, with the PTIN subsequently expiring.

2. Contact the CAF Unit. To close out a deceased practitioner’s CAF number, the assisting practitioner or a member of the practitioner’s firm (or in the case of a sole practitioner and no assisting practitioner, the executor or administrator of the practitioner’s estate) should send a written request, by fax or mail, to the CAF Unit identified in the “Where to File” chart in the Form 2848 and Form 8821 instructions. Once the CAF Unit receives the notice, they will mark the CAF # owner as deceased, which nullifies all authorizations listed on the CAF for the deceased practitioner.

3. Cancel employer identification number (EIN) and close out the account. If a practitioner becomes incapacitated and a fiduciary has been appointed (and a Form 56 is filed with the IRS), the fiduciary can withdraw the incapacitated practitioner from all active authorizations.
   The EIN is a business’s permanent federal taxpayer identification number, so it technically cannot be canceled. But for the EIN of a deceased practitioner’s business, the business account that is associated with the EIN can be closed. To close the business account, the deceased practitioner’s firm or assisting practitioner should send the IRS a letter that includes:

   1. Full legal name of the business
   2. EIN
   3. Business address
   4. Reason for closing the account

The notice assigning the EIN from the IRS should also be enclosed with the closeout letter, if available.

Send the document(s) to:
Internal Revenue Service
Cincinnati, OH 45999

The business account can only be closed once all necessary returns have been filed and all outstanding taxes paid. For more information, see: Canceling an EIN - Closing Your Account and Closing a Business.

Ensuring confidentiality of taxpayer information

The deceased practitioner’s firm, the assisting or successor practitioner, and the executor or administrator should safeguard any taxpayer information they receive from or in connection with the incapacitated or deceased practitioner’s practice. For general guidance on safeguarding taxpayer information, see IRS Publication 4557, Safeguarding Taxpayer Data (A Guide for Your Business).