It’s a subject no one likes to talk about, but sometimes it’s unavoidable: what happens to a tax practice when the practitioner dies? 

TaxGlobal is a strong supporter of CPAs and tax professionals, and we’re here to answer all your questions so you can plan for every scenario. First, let’s discuss why it’s important to make a plan.

Why does succession planning matter?

A succession plan addresses what will happen to your business in the event of your retirement, incapacity, or, yes, untimely death. Specifically, it lays out how your successors will handle the sale or termination of your business.

Why does it matter? When a practice owner dies unexpectedly, and doesn’t leave behind a succession plan, those who inherit the practice will be faced with a big legal mess. Among the questions they’ll have to ask will be:

• What will happen to the clients?
• Who will take over the practice?
• Should the practice be sold? If so, who gets the money?
• Who’s responsible for administering the estate?

If you don’t have a succession plan in place, and you’re a sole practitioner, the executor or administrator of your estate will have to figure out what to do. If you’re not a sole practitioner, your coworkers may take on that role.  

So, how do you lay out a good succession plan? First off, you’ll want to check the laws and regulations for your industry and geographic area. Legal regulations for your practice may vary based on whether you’re a CPA, enrolled agent, or attorney. 

A good starting point is Treasury Circular 230, which gives rules of conduct for professionals representing taxpayers to the IRS. While it doesn’t say exactly what to do in the event of a practitioner's death, it does lay out some best practices for succession planning in Section 10.33.

When should I start succession planning?

The first (and possibly most important) step in succession planning is communication. As soon as you engage a new client, you’ll want to discuss with them things like legal terms, scope of service, and the consequences of violating the agreed-on terms. All this should be laid out in an engagement letter, which will be given to the client (you’ll also want to keep a copy in your office).

You may also want to include a short section in your client engagement letter that explains what will happen in the event of your retirement or death. Make sure this includes who at your practice (if anyone) will take over your client’s taxes, what will happen to your client’s records, and what the client can do if they want to switch to a different practice. 

On that note, be sure you have a clear policy for keeping, disposing of, and returning your clients’ records and files. This policy should be stated clearly and comprehensively in, you guessed it, the engagement letter. 

One thing you may want to do is destroy client records as soon as they’re no longer needed. Keeping a client’s files can put their privacy at risk if you retire or die and leave the files at your practice.

This could be part of your data security and privacy plan, which is crucial not just for succession planning, but for day-to-day practice management. Make sure to comply with the rules and regulations for your area and industry, and consider setting up a business continuity plan that explains how you’ll deal with events like a cyberattack, fire, or natural disaster. This plan should also explain what will happen in the event of a practitioner’s unavailability or death. 

What steps do I need to take?

Here are some things you can do to start your succession planning.

1. Make an agreement with an “assisting practitioner.” This could be a coworker at your practice or a friend who has their own practice. This person will close your practice and/or help transition your practice to its next owner after your death.
2. Keep a running inventory of all open client matters, and include the clients’ names, addresses, and contact info. This inventory should be detailed enough that your assisting practitioner can quickly see what your clients need and what the deadlines are.
3. Secure all your clients’ files with passwords and encryption, but make sure the assisting practitioner will have a way to access those files securely if needed.
4. Make sure the assisting practitioner will have access to your practice’s funds and financial information, including things like monthly bills, client invoices, and bank accounts.
5. Talk to your clients ahead of time about whether they’re OK with your assisting practitioner representing them and viewing their information (via a Form 2848 or Form 8821) in the event of your retirement or death.
6. Make a plan for how your practice will notify and communicate with clients in the event of your untimely incapacitation or death. 
7. Talk to your coworkers and family members about your succession plan and their own involvement or non-involvement. 

What will happen to my practice if I die?

If you’ve appointed an assisting practitioner, they’ll take over in the event of your untimely death to carry out your succession plan, notify your clients of what’s going to happen, and communicate with the IRS on behalf of you and your clients.

1. Your assisting practitioner will implement your plan

In doing so, it’s their responsibility to:

• Make sure no files are moved without the client’s permission
• Control access to your practice’s premises
• Back up all electronic files
• Talk to employees, independent contractors, and vendors to make sure all clients and client property is covered
• Notify clients of the practice’s closure or transition and the need for them to find new representation (if applicable)
• Keep a copy of all your estate’s files in case of financial or legal claims

2. Your assisting practitioner will notify your clients

You should have already discussed with your clients how their records will be handled and who will take over their service. Now, your assisting practitioner will notify them of what’s happened and explain what to expect moving forward.

3. Your client has two choices

Your client may choose to remain with your practice under a different practitioner, or switch to another practice you’ve already agreed on transferring them to. In either case, your assisting practitioner will file all the necessary paperwork with the IRS to make that transfer.

Or, your client may choose to go somewhere else. If so, the assisting practitioner will oversee the transfer of your client’s files to another firm. Your practice is obligated to return all a client’s records if this happens. 

If you don’t have a succession plan in place, your assisting practitioner will need to talk to each client separately to figure out what they plan to do and get permission to transfer their records.

4. Your assisting practitioner will communicate with the IRS

To communicate with the IRS, your assisting practitioner will follow these steps:

• Notify the RPO (Return Preparer Office). If you have a PTIN (preparer tax identification number), then your assisting practitioner doesn’t need to notify the RPO, as the RPO regularly checks the NAP (National Accounts Profile) and will change the PTIN status to “deceased” if necessary. However, if you become incapacitated, you do need to notify the RPO. How does that work? A fiduciary (such as a guardian or trustee who has a Form 56, Notice of Fiduciary Relationship, on file with the IRS) will notify the RPO and tell them to change your PTIN status to “inactive.”
• Notify the CAF unit. Your assisting practitioner must send a written request to the CAF Unit listed in the “Where to File” chart of Form 2848 and Form 8821. When the CAF Unit gets this notice, they will mark that the CAF # owner is deceased. This nullifies all your authorizations listed on that CAF.
• Cancel your EIN (employer identification number) and close the account. Technically, your EIN can’t be canceled, since it’s your business’ permanent federal taxpayer identification number. But the business account connected with that EIN can be closed by an assisting practitioner or fiduciary. To do this, they’ll need to send a letter to the IRS with the:
  • Business’ full legal name
  • EIN
  • Business address
  • Reason the account is being closed (death, retirement, incapacitated, etc.)

You can’t close the account if you have any outstanding returns or taxes, so the assisting practitioner will need to be sure to wrap all that up first.

It may seem morbid to make these plans now, but it never hurts to be prepared, and you want to make sure your clients are taken care of in every possible scenario. Succession planning will ensure they are.