Who has responsibility for tax records after the death of a tax preparation professional?

Question

My girlfriend's grandmother recently passed away. She ran a tax preparation and accounting business out of her home. She was in possession of decades worth of tax forms (returns, etc.) and similar documents that belonged to clients over the years, many of who are inactive. We have been unable to get a straight answer about our obligations for handling these documents.

The accounts/clients from her business were sold to another woman. Is it legal for us to transfer everything to her possession?

What if she refuses to take the documents? Is it legal for us to destroy/shred/etc. the documents?

She was licensed/registered in Oregon, USA.

Update

After contacting the IRS a second time, and speaking with regulatory bodies in Oregon, we took the following actions:

1. The woman who purchased the active clients took possession of the relevant records.

2. Records older than 10 years could be destroyed (though we still chose to try to return them)

3. Individual records more recent than 10 years:

   1. Attempted to contact the owners and allow them to retrieve their documents.

   2. Provided a 7 day grace period to respond before destroying their records.

4. Commercial records more recent than 10 years:

   1. Used the Oregon Secretary of State business search to find active businesses and offered to return the documents: Oregon SOS Business Search

   2. Inactive businesses not associated with an individual client were destroyed

Food for thought:

About half of the businesses wanted the records, and the rest wanted them destroyed. Most individuals were very eager to retain their records, and grateful that we did not destroy them.

Answer 1

That really sucks. I've had similar experiences when handling the probate proceedings of lawyers who were not good about returning original wills to clients. I am providing an answer under general principles without researching Oregon specific accounting, record retention and probate laws, to at least give you a start although I recognize that a better answer would research these questions.

The accounts/clients from her business were sold to another woman. Is it legal for us to transfer everything to her possession?

Probably yes. There should be a government agency in Oregon that regulates accountants that has rules regarding that question. The linked rule seems to govern this situation. It says in Rule 801-030-0015(d) that:

(d) Custody and disposition of working papers.

(A) A licensee may not sell, transfer or bequeath working papers described in this rule to anyone other than one or more surviving partners or stockholders, or new partners or stockholders of the licensee, or any combined or merged organization or successor in interest to the licensee, without the prior written consent of the client or the client’s personal representative or assignee.

(B) A licensee is not prohibited from making a temporary transfer of working papers or other material necessary to the conduct of peer reviews or for the disclosure of information as provided by section (1)(b) of this rule.

(C) A licensee shall implement reasonable procedures for the safe custody of working papers and shall retain working papers for a period sufficient to meet the needs of the licensee’s practice and to satisfy applicable professional standards and pertinent legal requirements for record retention.

(D) A licensee shall retain working papers during the pendency of any Board investigation, disciplinary action, or other legal action involving the licensee. Licensees shall not dispose of such working papers until notified in writing by the Board of the closure of the investigation or until final disposition of the legal action or proceeding if no Board investigation is pending.

So, a transfer to a successor firm appears to be permitted.

What if she refuses to take the documents?

Her probate estate could retain them and stay open, they could be returned to clients, or there could be a rule established by the Oregon body that regulates accountants that authorizes a central depository of such records.

In Colorado, for example, in the case of law practices with no successors, original wills and estate planning documents can be deposited in the records of the court with probate jurisdiction that has jurisdiction over the territory where the decedent's practice was located.

But, I could not locate any provision of this kind in Oregon law.

Is it legal for us to destroy/shred/etc. the documents?

In many cases, yes. Some states, by statute or regulation, and others by custom, allow business records to be destroyed as a matter of course, normally one year after the longest statute of limitations that could apply to a dispute where the records would be relevant (often seven years since the longest normally applicable tax statute of limitations is six years).

Destroying tax returns is usually not a big concern because a transcript of the old tax returns can be ordered from the tax collection agency where they were filed.

But, business records related to purchases of property and capital improvements and depreciation, and related to divorces, can be relevant for decades after they were created, so the more honorable course of action would be to make at least a cursory effort (such as a postcard sent to a last known address of each client with a deadline for requesting a return of their file) to return the files of clients that include original business records as opposed to mere copies of tax returns.

Oregon has a seven year retention rule for most purposes pursuant to Rule 801-030-0015(e) which is linked above:

(e) Retention of attest and audit working papers.

(A) Licensees must maintain, for a period of at least seven years, the working papers for any attest or compilation services performed by the licensee together with any other supporting information, in sufficient detail to support the conclusions reached in such services.

(B) The seven-year retention period described in paragraph (A) of this subsection is extended if a longer period is required for purposes of a Board investigation as provided in paragraph (d)(D) of this rule and OAR 801-010-0115(3).

The referenced rule in that rule states:

(3) Requirements upon resignation. Upon resignation, a former licensee is required to:

(a) Surrender the CPA certificate or PA license to the Board;

(b) Take all reasonable steps to avoid foreseeable harm to any client, including but not limited to providing written notice of resignation under this section to all clients and inform all clients of where client records and work papers will be stored and of the clients’ right to secure copies of all such records and work papers at no cost to the client;

(c) Maintain client records for a period of at least six years, or return such records to the client; and

(d) Continue to comply with the requirements of OAR Chapter 801 Division 030 pertaining to confidential information and client records.

(e) For the purpose of subsection (b) above and unless otherwise required by the Board, a resigning licensee of a registered firm is required to give written notice to only those firm clients for which the resigning licensee was the sole or primary CPA on an engagement, an engagement leader, or the client relationship manager.

In practice, the consequences of destroying a record that shouldn't have been destroyed are likely to be minimal, because any recovery would be limited to the assets of the estate and there is a time limit for making claims against estates which is quite strict, and your grandma has no license to revoke.

But, again, the honorable thing to do in order to honor her legacy and do right by her former clients would be to either transfer the records to a successor firm or to attempt to return them, as she would be required to do if she had surrendered a license during life.