Tax practice succession planning protects clients and firms

Tax professionals spend their careers helping clients prepare for financial uncertainty, but they may overlook an important question about their own businesses: What happens to the tax practice if the practitioner dies or becomes incapacitated?

An unexpected tax practice transition can leave clients wondering about pending returns, IRS matters, records and approaching deadlines. Employees and family members may also be left trying to determine how to protect client information and wind down or transfer the practice. The IRS Office of Professional Responsibility (OPR) recently highlighted best practices tax professionals can use to prepare for these situations.

While Circular 230 does not directly address every consequence of a practitioner's death or incapacity, proactive succession planning can help protect clients, the tax practice and the practitioner's family.

Start planning early

A successful transition begins with strong business practices already in place. Tax professionals should clearly communicate the scope and objectives of any engagement with their clients. A comprehensive engagement letter or agreement can document these details, while written updates can record important developments as the engagement progresses.

This documentation becomes especially valuable when another practitioner unexpectedly needs to take over a client's tax matter. Instead of trying to reconstruct the engagement, the assisting practitioner has information that can help identify the client's needs and outstanding responsibilities. Practices should also establish policies covering the retention, return, destruction and disposition of client records. Keeping records longer than necessary can increase exposure of private client information and create additional work for those responsible for handling the practice after a practitioner's death or incapacity.

Create your plan

OPR recommends that practitioners consider a formal succession plan addressing how the business will be sold or terminated because of retirement, incapacity or death. One important step is establishing an agreement with another tax professional who can serve as an assisting practitioner. That individual should understand the practice well enough to help close it or manage the transition when necessary.

A succession plan includes the following:

• Updated inventory of open client matters. That inventory should provide enough information for someone stepping in to understand each client's needs, expectations and upcoming deadlines.
• Information access and data security. Consider how the assisting practitioner will access information needed to keep bills and other financial obligations current while protecting client data and other records.
• Representation before the IRS. Practitioners can discuss with clients whether additional professionals should be authorized. Having additional authorization in place may help prevent interruptions in an ongoing IRS matter.
  • Form 2848, Power of Attorney and Declaration of Representative, authorizes an eligible representative to act on the taxpayer’s behalf before the IRS, as well as sign certain documents. Additionally, representatives can receive and inspect confidential tax information.
  • Form 8821, Tax Information Authorization, authorizes a designee to receive or inspect confidential tax information but does not grant authority to represent the taxpayer before the IRS.

Give clients control over the transition

A tax practice succession plan does not eliminate the client's right to decide who handles their tax matters.

If a client chooses to remain with the firm or work with a practitioner identified in advance, the assisting practitioner should make sure necessary IRS paperwork is completed, particularly when a client is under examination.

Clients who choose another practitioner should have their records transferred promptly and in an orderly manner. Circular 230 §10.28 addresses a practitioner's obligation to return client records when requested. Client files should not simply be transferred to another tax professional without the client's permission.

Protect client information

Confidentiality responsibilities do not disappear when a practitioner dies or becomes incapacitated. OPR recommends practical steps that include controlling access to the practitioner's office, backing up electronic records and ensuring files are not removed without client permission. The assisting practitioner may also need to speak with employees, independent contractors and vendors to identify clients or client property that may not be apparent from the practitioner's records.

Don't overlook IRS administrative steps

Several IRS-related matters may need attention after a tax practitioner's death or incapacity.

If a deceased practitioner had a preparer tax identification number (PTIN), OPR says there is no need to notify the Return Preparer Office of the death. The office periodically checks information that allows it to update PTIN records.

The process differs for an incapacitated practitioner. Depending on the circumstances, notification and Form 56, Notice Concerning Fiduciary Relationship, may be relevant to changing the practitioner's PTIN status.

A deceased practitioner's Centralized Authorization File (CAF) number also requires attention. A written request can be submitted to the appropriate CAF Unit to mark the CAF number owner as deceased. Doing so nullifies authorizations associated with the deceased practitioner.

A business's employer identification number (EIN) cannot technically be canceled because it is permanent. However, the IRS business account associated with the EIN can be closed after necessary returns have been filed and outstanding taxes have been paid.

Make succession planning part of practice management

No tax professional wants to think about leaving clients, employees or family members to manage a practice after an unexpected death or incapacity. Avoiding the subject, however, can make an already difficult situation much harder.

A business continuity plan should cover more than hurricanes, cyberattacks or other widespread disruptions. Planning ahead can help protect confidential information, reduce disruption to pending tax matters and give clients a clearer path forward when their trusted practitioner can no longer serve them.

NATP encourages tax professionals to make succession planning and business continuity part of their overall practice management strategy. Taking time to prepare today can help protect your clients, your tax practice and the people who may one day be responsible for carrying out your wishes.