When death and taxes meet

The death, illness or even just retirement of a practitioner can leave behind not just an untended practice but many unanswered questions and a great deal of uncertainty about consequences for clients.

While Treasury Circular 230 does not directly address the implications of a practitioner's death, "Section 10.33 sets forth aspirational best practices that tax practitioners should consider," the Internal Revenue Service said in its latest "Best Practices" primer, how practitioners can apply for the inevitable. 

The agency's recommendations build on many best practices that should be in place before any transition. For example, a tax practice's business continuity plan that addresses such events as natural disaster, cyberattack or a pandemic should also lay out the steps to take in the event of the practitioner's incapacity, death or general unavailability. Pertinent portions of the plan can be shared with clients, as can parts of a formal succession plan.

Other recommendations:

• A comprehensive engagement letter and timely updates will help the transition of the client to another tax pro.
• The practice should have a policy for the retention, disposition (including destruction), and return of client files and other records. Retaining client files beyond the need for them leaves practitioners at risk for potential exposure of confidential information.
• There should be a communications plan to inform clients in the event of the practitioner's incapacity or death. The procedures should cover handling of ongoing client matters according to what each client wants and for the disposition of client files.
• There should be an agreement with another tax practitioner who will close the practice.

Practitioners should keep an up-to-date inventory of all open client matters, including client names, addresses and contact information. This inventory should be detailed enough to allow the succeeding practitioner, or whoever assumes responsibility for the client, to quickly comprehend their needs and expectations.

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All files should be secured with passwords and encryption, with steps taken to ensure that the next practitioner can securely access the records. Practitioners should discuss with clients whether it makes sense to authorize extra practitioners to represent them or receive information on their behalf (via a 2848 or an 8821).

If a client chooses to remain with the practitioner's firm, the succeeding practitioner must ensure that all necessary paperwork is filed with the IRS (especially for clients under examination). 

If there is no succession plan in place and the clients aren't able to receive advance notice, the succeeding practitioner should promptly confirm arrangements with each client — and no client files should be transferred to another practitioner without the client's permission.

For more, see the IRS publication Safeguarding Taxpayer Data as well as Canceling an EIN - Closing Your Account and Closing a Business.