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Tax Practitioner Responsibilities in Planning for His or Her Death or Disability

William Stromsem, CPA, J.D., George Washington University School of Business


In your firm planning for death or incapacitation of an owner, owners will want their families to receive the benefits of their life’s work and will want the firm that they built to continue without a major disruption. Part of a firm’s smooth continuity is in serving clients and in fulfilling professional responsibilities to the tax system. This article deals briefly with succession planning and then covers some best practices under Circular 230 to serve clients in a professionally responsible manner.       


Succession Plans


When was the last time you reviewed your firm’s plans in case of an owner’s disability or death? No one likes to dwell on these events, and we all like to think that we will enjoy many years of retirement before becoming incapacitated or dying. However, it has probably been years since you updated the governing agreements for your firm or since you updated your estate plan. Your business is one of your most valuable assets and one of the great accomplishments of your life, and you want to be sure that your family will receive what you have earned and that your firm can continue serving clients as smoothly as possible without you. Benjamin Franklin, who is often quoted about the certainty of death and taxes, also said that “By failing to prepare, you are preparing to fail.”


Hopefully, your firm has a well-drafted formal succession plan that covers disability, death, divorce, retirement, sale of an interest and other possible contingencies. If not, you need one, and if so, you might want to update it for any changed circumstances. For example, if your firm used a fixed rate for capitalizing income to determine the value of your share, that rate may be out of date with today’s expected return on investments. Or members of the firm may have become divided on an important issue so that the death of a partner might shift the balance of power to affect governance of the partnership going forward. Firm succession planning can be stressful, but it is likely fairer and less difficult than just crossing your fingers and hoping that there will not be any problems.   


If you are a sole practitioner, you don’t have co-owners to work with and generally will deal with succession in your estate plans rather than having a formal succession plan. However, you might want to set up directions in advance or discuss matters with family members to help them settle your business affairs. You could advise on who might (or might not) be a good purchaser of the practice, who might provide legal assistance, how to avoid the unauthorized disclosure of client information by your executor and other matters.


If there is enough advance warning, you might arrange another CPA to wind up your practice when you are unable to proceed. If you employ family members in the firm, there may be conflicting expectations as to who will be in charge when you are gone, and you may want to communicate with family members in advance or leave a letter explaining the disposition of your firm. (Note that a succession plan is an ethical requirement for sole-practitioner attorneys and is required or recommended in many states.)


For LLCs and LLPs, you should review organizational documents with your co-owners and make sure that they still reflect everyone’s intentions. You might have a simulated exercise to see what would happen in various scenarios; e.g., death of an individual owner, simultaneous death of two owners, or a broader disruptive event such as a natural disaster, war or pandemic. After your review, if the documents do not need much adjustment, you can ask an attorney to just update them. If there are disputes as to how things should be handled, an attorney might be brought in to help avoid possible deadlocks by suggesting alternate approaches. The agreement might also provide a way to resolve issues that are not envisioned in your plans and that mechanism could be anything from formal arbitration to a coin toss.   


There are also many details that might be taken care of outside the succession plan to assure a smooth transition. A simple document listing information that your firm will need when you are no longer available should be kept secure until needed and provisions should be made for this to be available to any successor. This document might help avoid the need for the firm to gather a week after a partner’s death to hold a séance to ask for usernames and passwords. 


Professional Responsibilities to Your Clients and the IRS


IRS Circular 230 does not provide standards for a practitioner in planning for the death or incapacitation, but Section 10.33 encourages general best practices, and on June 27, the IRS Office of Professional Responsibilities provided some relevant best practices in Bulletin 2023-05 that may help protect our firms, our clients and our families.


In addition to a succession plan, such as described above, the Director of Practice suggests a variety of best practices:


  • Regular client communications will help make an easier transition, and an engagement letter or other communication might address potential transition issues to help prepare everyone.   
  • Engagement letters should address the disposition of client records at the end of the engagement, including the firm’s policy for destroying or returning client records and any purposes for which the records might be retained by the firm. Section 10.28 of Circular 230 requires that client records be returned on request and any successor practitioner would have a similar obligation.
  • Data security and privacy plans will help prevent the unauthorized disclosure of any client tax information that is retained by the firm. (See two IRS publications IRS Pub 4557 Safeguarding Taxpayer Data and IRS Pub 5293 Protect Your Clients; Protect Yourself, Data Security Resource Guide for Tax Professionals.
  • Procedures should be established for transferring a client’s information within the firm or to another firm, and the client should be involved in any decisions. Succession, data security and privacy plans might be communicated in general terms with the client as needed.
  • Procedures should be in place to notify a client of a death or incapacity of the practitioner.
  • Client files should be kept up to date with contact information and any pending matters, including important upcoming deadlines if the taxpayer is involved in a controversy with the IRS.
  • Your engagement letter might include the possible need to authorize alternate practitioners to receive tax information and represent the client, with Forms 2848 and 8821 promptly executed when needed.
  • Client files should be encrypted with passwords and provisions should be made to assure that the passwords are available to a successor.
  • Review your succession plans with family members so they are prepared.    
  • A sole practitioner’s plans might consider publication of the closing of the office and the need for clients to seek new representation and request all client materials retained by the firm.
  • 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.
  • Notify the IRS Return Preparer Office that a practitioner is deceased or became incapacitated so that they can change the PTIN status to deceased or inactive.
  • Notify the IRS CAF Unit to close the deceased practitioner’s CAF number and remove the authorization from all active files.
  • Notify the IRS to close out a sole practitioner’s Employer Identification Number (EIN).
  • 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.


These items are just examples of best practices and more broadly, Circular 230 encourages tax advisors “to provide clients with the highest quality representation concerning federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the IRS.” Best practices may vary from firm to firm and client to client, but practitioners should adapt to try to provide a smooth transition to help clients, firms and families, and to fulfill their professional responsibilities.     


We all like to think that we will live on indefinitely, but you might be writing a blog about firm succession planning and in the middle of an important concluding sentence, you … .  


Doug Benton

Funny ending to the commentary. Not Seinfeld funny but humor where it wasn't expected. ;)

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